Clause 24.—(RATES OF PROFITS TAX, ETC.)

I beg to move, in page 16, line 25, to leave out "forty," and to insert "forty-five."

The effect of the Amendment will be to increase the rebate for undistributed profits from 40 per cent. to 45 per cent. and if it is accepted it will leave the tax on distributed profits at 50 per cent. but will reduce the tax on undistributed profits to 5 per cent. I wish to put the case for this Amendment at some length because it is at least one of the most important Amendments that we shall have to consider.

Some of my colleagues, when speaking on earlier Amendments, have been accused of delivering lectures. I shall try to avoid that charge, but I wish to deal with some of the arguments which the Chancellor put forward in his Budget speech when recommending the method of dealing with Profits Tax which he has incorporated in this Clause. I think it is also of importance to this discussion that the Committee should remember that we approach it with Income Tax at 9s. 6d. in the £ and with the initial allowances withdrawn as from next year, and I think that those are two very relevant considerations bearing upon the question of the amount of Profits Tax.

The Chancellor, in his Budget speech, put forward five propositions to defend his action in this Clause. He said:
There are some who disapprove of profits in principle. I do not share their view. In an economy three-quarters of which is run by private enterprise, it is foolish to ignore the function of profit as an incentive.
Then he made certain qualifications.

His second proposition was:
There is no doubt that the level of company profits has recently been increasing
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rapidly. After a period of relative stability in 1948 and 1949, they are estimated to have increased in 1950 by nearly 14 per cent.—as against a rise in money incomes generally of nearly 7 per cent."—[OFFICIAL REPORT, 10th April, 1951; Vol. 486, c. 854.]
Then his third proposition was that the dividends had gone up as well as profits; and he quoted some figures published in the "Financial Times" showing that ordinary dividends increased by 2 per cent. in the first half of 1950 compared with the corresponding period of the previous year, that in the second half of 1950 they increased to 6.7 per cent., while in the first two months of 1951 the increase was 10 per cent., and that in March the increase had been more than 14 per cent.

After outlining that situation, he put forward his fourth proposition and rejected the statutory control of dividends. He gave some very good practical reasons against adopting that solution, but then he went on finally to say that he had decided to increase the rate of Profits Tax on distributed profits from 30 per cent. to 50 per cent., and he said:
Since firms will be liable to the high tax on profits earned now, in so far as they are to be distributed later, we can, I think, safely assume that from now onwards more will be set aside for tax reserve and less paid out in ordinary dividends."—[OFFICIAL REPORT, 10th April, 1951; Vol. 486, c. 856.]
He went on to assume that the net increase in corporate savings from that would be £30 million in the current year.

I wish just to examine those five propositions one by one, because I think they go to the root of this problem of whether we should accept this Clause as it stands or whether this Amendment should be accepted.

With regard to the Chancellor's approval of profits, we welcome his words. That is one of the few gleams of hope in his Budget speech, and we are prepared almost to be effusive with a repentant sinner like this coming down to acknowlege previous errors; and I think he does deserve a measure of congratulation not only for standing up to the right hon. Member for Ebbw Vale (Mr. Bevan) but also for stating quite plainly that he does not see anything vicious in profits. In fact, that view is not restricted to the Chancellor alone. I think it is endorsed by some of the more sensible of his colleagues. I was very struck by a speech made by the hon. Member for Bolton, East (Mr. Booth), who, dealing with the
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standard rate of Income Tax and talking about increases in taxation, said:
What is the alternative? I have not heard one offered. After all, we do not complain about profits. Profits are earned by good management, and there will be profits in the nationalised industries when there has been time to sort things out."—[OFFICIAL REPORT, 6th June, 1951; Vol. 488, c. 1132–3.]
He may be rather optimistic with regard to that second statement—[An HON. MEMBER: "There are such profits now."] I think that the hon. Gentleman was referring to profits earned by good management and not profits earned just by a monopoly putting up the prices.

Therefore, on that first point, as I say, we acknowledge the Chancellor's words with a certain degree of pleasure, and we hope that he will convert on this topic certainly some of the hon. Members who are at present sitting behind him. Of course, one must feel some sympathy with the Socialist Party, for they have spent their lives denouncing the rich, and now it has been admitted that not much more can be got out of them; then they abused the bosses, but for a long time now we have seen a trade unionist sitting alongside the boss—even if he is not actually the boss, as in the case of the dockers. So now they have to denounce profits, but—and this is the burden of my speech—there is no one who has a greater interest in the profitability of industry than the workers themselves. Therefore, one is thankful for this glimpse of common sense on the part of the Chancellor.

The next point that the Chancellor made was his rejection of the statutory limitation of dividends. I think political necessity dictated the moderation or rather the brevity of his argument, but any argument that applies against the statutory limitation of all wages seems to me to apply against the statutory limitation of dividends.

As to the Chancellor's point about the increase in Profits Tax on dividends, I want to deal with that for a moment or two. He was not, in my submission, quite frank with the Committee on that occasion. He did not tell the whole truth. It is true that there has been a certain increase in dividends, but what are the facts about those increases? I refer first to Table 9 of the right hon.
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Gentleman's own White Paper, Cmd. Paper 8203, on National Income and Expenditure. That Table 9 showed that trading profits between 1947 and 1950 rose from £1,527 million to £1,692 million; dividends, rose from £824 million to £827 million; and even if, giving the Government's supporters the present of a point, we include the interest on the stock of nationalised industries, the figure has increased from £853 million only to £918 million. I am missing out the intermediate figures for 1948 and 1949 and comparing 1947 with 1950. Trading profits were up by 10 per cent.; dividends and interest of companies were up by one-half of 1 per cent. and, including interest on capital in nationalised industries, there was an increase of about 7½ per cent.

4.0 p.m.

Contrasting those figures with figures in Table 11 of the White Paper, for wages and salaries we see that in 1947 the figure for wages was £3,671 million, and in 1950 £4,611 million. Salaries in 1947 were £1,981 million, and in 1950 £2,522 million. Thus, between 1947 and 1950 wages and salaries increased by over 25 per cent. I make no complaint about that, but in seeking to present the facts about these other percentage increases, that is a relevant factor. Also we must remember that Government supporters are constantly pointing out to us the benefit of the indirect transfer payments which they say are also really indirectly increasing wages. Therefore, if that is taken into account, the increase is more than 25 per cent.

It may be said that there are two other relevant considerations to these percentage increases. I apologise for going into this, but, after all, these were the percentages on which the Chancellor founded his case. On wages, it may be said that more people are employed. In the Economic Survey, the figure for mid-1948 was £21½ million, and at the end of 1950 it was 22.1 million—an increase of about 2½ per cent. On profits and dividends another relevant consideration is the increase in the amount of capital employed, because the profits have been earned and the dividends have been paid on a great deal more capital, on more savings, on money that has been ploughed back.

It is difficult to get at the whole of the figures, because so far there are no satisfactory statistics on the point, but an analysis did appear in the "Financial
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Times" of 624 companies whose accounts were published in the first three months of 1951. That analysis showed that their earnings were up by 11½ per cent.; the issued ordinary capital and capital revenue reserves were up by 9½ per cent.; dividends had gone up by 11 per cent., so that those percentages had kept more or less in line with one another. For the companies whose accounts were published in April, the ordinary capital plus capital revenue reserves had gone up by 12½ per cent., and dividends had gone up by 8½ per cent. In the first set of figures the ratio of dividends to capital employed was about the same, and in the second set the ratio of dividends to capital employed was considerably lower.

I submit that, unless that fact is disclosed when talking about increases in dividends, one is not giving the whole picture, because it has to be remembered that one of the matters for which the Chancellor takes credit is the fact that in the last four years corporate savings have amounted to something like £2,000 million—money ploughed back.

Well, is it the Chancellor's suggestion that that capital is to have no return? That is a matter upon which it is very easy to misrepresent, particularly if talking to a popular audience. For instance, take Dunlop Rubber: in 1949, £700,000 were paid in dividends; in 1950, £1,200,000 were paid in dividends—an increase of 70 per cent. It might be said: "What a monstrous thing. What a dreadful increase in dividends."

But unless there is disclosed the fact that the public subscribed nearly £10 million in the interim by way of extra capital, one does not get at the full figures, and that takes no account of the money actually ploughed back by the company itself. I dispute that there has been any great disproportionate rise in dividends. I think that the ratio of dividend to capital has remained fairly constant. If account is also taken of the fact that we have a cantering inflation, I think we must realise how much misrepresentation and exaggeration there has been of this problem.

It seems to me that this very substantial increased tax by the Chancellor on undistributed profits is a very poor reward for those who responded to appeals for restraint in dividend payments, because on the whole those appeals
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were very scrupulously honoured, as has been repeatedly stated by those in authority. The vast majority of companies obeyed the Chancellor's request, and the result is that they will now be very much worse off.

I do not want to be unduly controversial in moving this Amendment, but that does seem to me to be typical of Socialism. If a person denies himself and withdraws his purchasing power from the market, if he conserves his reserves and responds to appeals for restraint, then, whether he be an individual or a corporation, in the long run he is worse off. That has applied to savers and former shareholders in nationalised undertakings who exercised a policy of restraint in spending, and it has now happened to people who responded to appeals for dividend restraint. In the long run they will all be worse off.

I submit that in his approach to this matter the Chancellor fell below the standard of moderation and of resistance to irresponsibility which he showed in other parts of his Budget speech. That the Chancellor was guilty of that omission is also shown by the fact that he never would speak about the actual cash amounts involved; he always spoke in terms of percentages. The actual inflationary effect of these increased dividends is, in my submission, very small. A 1 per cent. increase in wages and salaries means 72 million, whereas a 1 per cent. increase in dividends means £8 million. That, again, is a matter which should be disclosed to the public when talking about the inflationary effect of dividend increases. I submit that the facts and figures I have put before the Committee show the Chancellor's statements about the increases in profits and dividends in their true perspective.

Now we come to the consequences of his action in increasing the undistributed Profits Tax, which leads to the necessity for this Amendment. On 10th April the Chancellor said:
we can … safely assume that … more will be set aside for tax reserve and less paid out in ordinary dividends."—[OFFICIAL REPORT, 10th April, 1951; Vol. 486, c. 856.]
Is that fair? Why is it that in present circumstances it is right that shareholders should get less? The Government have had to increase their own rates. They have increased by 20 per cent. the interest on Saving Certificates in order to get new
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savers. I read the other day that Lord Piercy, the Chairman of the Industrial and Commercial Finance Corporation, Ltd., a Government nominee—[HON. MEMBERS: "No."]—well, he is indirectly a Government nominee; he is a nominee of the Bank of England, and the Bank of England is nationalised. He revealed a week or two ago that his institution is now making a higher charge.

The latest adjustment in interest rates is that the Agricultural Mortgage Corporation, Ltd—which again is a Government-sponsored institution, I believe—has increased its interest rate from 4 per cent. to 4¼ per cent. The Government are therefore conceding that, in present circumstances, the person who contributes, the capital saver, is entitled to rather more return instead of rather less return upon his capital.

Why is it reasonable, therefore, that the Chancellor should expect less to be paid out by way of ordinary dividend? If he wants savings, if he wants people to deny themselves and to withdraw their purchasing power, why is he not prepared to increase their rewards, or at all events to keep pace, in a rough and ready manner with rising costs? I fail to see why it is not just and reasonable for any person whose mind is not clouded by party prejudice to concede that the company which, for example, has not increased its dividends for five years in response to appeals for restraint, should not now increase its dividends, at all events to keep roughly level with the depreciation in the value of money. It is significant that many companies have not gone as far as that. It therefore seems to me to be quite unrealistic for the Chancellor to expect companies to reduce their dividends at the present time.

There are very many small shareholders, and it will be a grave hardship to those people living on small fixed incomes if there is any reduction of ordinary dividends at the present time. If ordinary dividends are not reduced as a result of this step, it means that the extra taxation will have to be paid out of corporate reserves. There is no disputing that fact. The tax has been put up by 30 per cent. and if ordinary dividends are not to be decreased, it means that there must be an extra tax bill for companies to pay.

I was coming to the question of increase in profits. I am dealing with the tax bill. It must go up. If the same dividends are to be paid as before, there will be a higher sum to be paid out in Profits Tax by companies who have distributed these dividends. I think that is a self-evident proposition.

One has only to look at the right hon. Gentleman's own figures. The current view is that over the past two or three or more years British industry has been very prosperous—is bulging with money, has no cause for worry, and can easily afford these increased rates of taxation. If he will look at Table 26 of the Economic Survey for 1951—the figures were given by my right hon. Friend the Member for Saffron Walden (Mr. R. A. Butler) very early on Friday morning—that table shows the position of corporate savings. It shows that undistributed profits went up by £211 million between 1950 and 1951.

The 1951 figures are a forecast and according to that forecast undistributed profits have increased by £211 million from £569 million to £780 million. The provision for stock appreciation—that is to say, the money needed to continue to finance business—has gone up from £270 million to an estimate of £700 million—an increase in 1950 in corporate reserves of approximately £300 million and in 1951 of £80 million. There is an adjustment to be made in the 1951 figures because £100 million of that £700 million is depreciation for public corporations.

If we make that adjustment and give the Government a present by making no corresponding adjustment in the 1950 figures, it means that for 1950 corporate savings were up by £300 million and in 1951 were up by £180 million. The figures for 1938, given in the same table, show that the corporate savings were up by £171 million in that year and the figure for 1951 is £180 million compared with £171 million for 1938. That, in my submission, taking into account the decrease in the purchasing power of the £, shows that the situation for 1951 is not going to be anything like as satisfactory as for 1938.

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There is another way of looking at this matter of whether industry is really bulging with money. It is shown by the figures quoted by my hon. Friend the Member for Chippenham (Mr. Eccles) early in the morning of 8th June. He was dealing with the withdrawal of the initial allowances. He stated:
According to the Chancellor, over the whole of industry £170 million will be taken away, in the sense that they will have to borrow that money or find it from their own cash resources. Their cash is going to be seriously depleted, and this may have very serious consequences. I have seen a sample of a large number of industrial firms showing the relation between their cash resources and their turnover in 1938 and 1949. In 1938 they had 13 per cent. of their annual turnover in cash. From pre-war experience that may well be considered as none too high. Nobody would have said that industry in 1938 had too much cash. In 1945, for which I have no figures, I know that the cash ratio was much higher. The figure for 1949 is 7½ per cent. It has dropped already to nearly half of what it was before the war. This is one of the most serious figures in industry today."—[OFFICIAL REPORT, 8th June, 1951; Vol. 488, c. 1564–5.]
I think that most people will believe that that process has gone on, and on the ratio of cash to turnover for the past year the figure would be lower than the 7½ per cent. to which my hon. Friend referred.

4.15 p.m.

I submit that reference to the table in the Economic Survey and the figures about cash resources show this heavy taxation as being a constant strain upon the resources of industry. Whatever the apparent prosperity and whatever the misleading opinion which may be formed by people who see reports of large increases in profits, in fact industry is being weakened, and its resources are being weakened as time goes on and are being drained away in excessive taxation.

That point is enormously aggravated when one realises that profits are assessed on a basis which is not that of true profit. I do not want to enter on that argument because reference has been made to it already, and it is a matter which could be debated on its own. These figures of profits are all the more misleading because they do not represent true profits at all and the taxes levied on profits are not taxes on true profits. I do not propose to elaborate on that point because I think even the Government must have appreciated it by now.

One of the most disappointing features of the Budget is that Sir Stafford Cripps'
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recognition of that fact in giving an initial allowance to meet that point, has now been obliterated by the withdrawal of the initial allowances without any alteration in the methods of assessment of profits. It is because we on this side of the Committee appreciate the necessity for the re-armament programme that we are putting forward this very moderate and reasonable Amendment. The 20 per cent. increase in the tax on distributed profits is not dealt with in the Amendment. We are seeking to preserve the position of company reserves to see that they will have in their possession sufficient resources to enable them to modernise and equip industry so that it can face its task in the future.

I believe that many Members of the benches opposite who have attempted to follow my argument, if they could approach this matter without party politics entering into it, would agree that a good case has been made out. The Government desire to raise £60 million by their alteration in the rate of Profits Tax. Acceptance of this Amendment would reduce the increase from £60 million to about £31 million. Our submission, in seeking to strengthen the position of company reserves, is that it would be false economy and bad planning and expensive in the long run not to accept the Amendment.

The people who are most concerned in this matter are the people who work in industry. All sorts of difficulties are going to face them in the future. The hon. Member for Stoke-on-Trent, South (Mr. Ellis Smith) referred to one of them in connection with Japanese and German competition, and when the re-armament programme slackens off in the United States there will be a tremendous impact of American competition in our export countries.

If we are to retain full employment and preserve our competitive capacity, it is essential that reserves should be available to British industry to modernise itself. The Minister of Labour said that there was two h.p. behind each worker in this country compared with six h.p. in the U.S.A. These are very serious figures considering the extent of American productive capacity to be expected in the future. This is a matter of the greatest importance to British industry. It is for all these reasons that I have moved the Amendment.

Like my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), who has made such an admirable speech, I realise the necessity for high taxation today, partly because of the necessity for re-arming on a great scale, which we on these benches do not consider to be any fault of this Government and partly, of course, because of the Government's extravagant expenditure in the past, which we think has been quite unnecessary. Quite clearly, high taxation must hurt, and there can be no levying of high taxes without a great deal of hurting, but I should have thought that any tax to be reckoned good must pass two tests.

First of all, it should be fair as between those who have to pay it. This Profits Tax is most unfair in that respect. I should like to give an example to show what I mean. If we take company A, which has a capital of £500,000 in ordinary and £500,000 in debenture shares, it makes £100,000 profit, and the amount available, after paying Profits Tax, is £67,500 for reserves, for distribution and for Income Tax and Profits Tax on distributed profits.

Let us then take company B, which makes the same profit and has the same capital, except that £500,000 is in preference rather than in debenture shares. In that case the amount available for distribution or reserve is not £67,000 but £55,000. No blame attaches to company B in that it wished to raise the funds by preference shares rather than debenture stock, and no one should blame the shareholder for investing in company B rather than in company A, but why should one set of shareholders suffer from that tax so much more than the other?

The second test which any good tax should pass is that the dislocation of production should not be out of all proportion to the amount that is raised by it. I should like to quote the "Economist" of 14th April, which said:
Income and Profits Tax together, the State now absorbs up to two-thirds of his return. On such terms little new money is likely to be put into the expansion of businesses whose future is at all uncertain. It spells the end of innovation and industrial expansion.
The difficult thing about it is that this is going to hit the smaller companies, who have to make their way far more than the
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great companies, who have accumulated reserves and who are able to borrow because of their reputation. It is essential to an increase in production—in fact, to the prosperity of this country—that there should be continual new blood and that the rising, enterprising small concerns should become big. They are going to be tremendously handicapped by this tax.

All the great companies, on which the wealth of this country is dependent, started small. It is only State concerns which start at the top, and the experience we have had in Africa does not encourage that method of financing industry. What has been done in this country has been done well, namely, to let the small companies fight their way up to the top. This tax will upset the progress of industry out of all proportion to the relatively small amount of money which it will raise.

My hon. and learned Friend the Member for Wirral made a very formidable attack on this tax, but I think that on the whole it is hardly as formidable as that made by the Minister of Town and Country Planning some years ago. It may well be that the Financial Secretary to the Treasury will tell me that this particular Minister has not much influence on the Treasury Bench today, but there was a time when he must have had a certain influence with his present colleagues. Perhaps I may be permitted to quote what he said in a book which was revised in 1935:
Again, a special tax upon business profits, such as the post-war British corporation profits tax, now repealed, was a bad tax from the present point of view. For it discriminated against a particular class of property-owners, namely, the ordinary shareholders in joint stock companies, as compared with all other classes, including debenture holders and the holders of gilt-edged securities. It was, therefore, in effect, a tax on risk-bearing, and tended to divert the flow of capital from risky to comparatively safe investments. But in view of the need that risks should be taken and the reluctance of many investors to take them, this was a harmful diversion.
If the Chancellor of the Exchequer is perhaps no longer influenced by the thoughts of the Minister of Town and Country Planning on economic matters, he may be influenced by the T.U.C., and I should like to quote very briefly from their last memorandum, in which they said:
Other things being equal, a high and progressive rate of taxation will reduce the willingness and ability of individuals and corporations to invest at risk …1689
Then at the end of the paragraph, they concluded with these words:
We consider, however, that the Government can and should undertake to provide risk capital where necessary.
If the Chancellor of the Exchequer is guided by those views, he should make it plain to the country that it is the Government's intention to provide this capital. I suggest that there are many peopl—

The hon. Member for Scarborough and Whitby (Mr. Spearman) is really dealing with the general case and not the particular rates of tax which are the subject of this Amendment, and to some extent the hon. and learned Member for Wirral (Mr. Selwyn Lloyd) did the same thing. I have no objection to a full debate taking place on this Amendment, but it must not be repeated on the Question "That the Clause stand part of the Bill." Hon. Gentlemen ought to make their choice so that we have not the same debate repeated. My own view is that this particular debate should be limited to the Amendment before the Committee.

Following the general considerations on this Amendment on undistributed profits which have been put forward by my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), I should like for a moment to draw the Chancellor's attention to one part of manufacturing industry which will be particularly hard hit by the general increase in the level of taxation and which would therefore derive a great deal of benefit if the Chancellor could see his way to make this concession. I need not labour this point at great length, because the Chancellor or the Financial Secretary has had a letter from me, and they will
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know the particular case to which I am referring.

This case—and there are many other industrial enterprises all over the country in the same position, as I know from my personal experience—concerns engineering undertakings, which had to expand very rapidly during the last war to meet the necessary commitments which were laid upon them. If they had a small nominal capital, as many small companies have—and as my hon. Friend the Member for Scarborough and Whitby (Mr. Spearman) has said, it is the relatively small concerns which are reallly the industrial foundation of this country—very often they had bad E.P.T. standards. Though they achieved enormous profits on paper during the war, they were of no value whatever to them, and they were taken from them, so that they ended the war in a weak liquid position as far as their assets were concerned.

4.30 p.m.

They then went into the doldrums for a year or so after the war. Now they are being asked again to accept a greater burden, and to step up their productivity to meet the new re-armament programme. I submit to the Chancellor that that type of firm finds itself in a most difficult position. It nearly always has a very large overdraft at the bank. The bank is often reluctant to increase the overdraft. That firm now finds it has to try to double its output. I know many firms which, since 1946–47, have doubled their output. The Chancellor knows even better than I do the strain that is placed upon those firms by the need to carry larger stocks and to buy new plant which, after next year, will not benefit by the 40 per cent. deduction.

The concession for which we ask is very small relative to the total burden of taxation, and might prove to be a useful investment for increased productivity. Naturally there could be no immediate effect of such a concession, but there would be an effect in the years to come. After all, the main burden of the rearmament programme will not be felt until 1954 or 1955, and I always have in mind the parallel job that we in industry have to do, which is to maintain our general trading position all over the world.

That means that we should be constantly putting money to reserve, and trying, as we do in my own small company,
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to finance ourselves as far as we can as we go along. Each year we should be able to afford to put so many thousands of pounds into new plant, or into reserves for new plant when we can buy it. Under the new level of taxation, well over 70 per cent. of earnings will, I think, be taken in taxation. With that kind of burden laid upon industry, it will be very hard for the smaller companies to finance themselves without greater recourse to the banks or to other forms of borrowing, and so to modernise themselves as they go along.

A great deal of the industrial greatness of this country has been built up on this kind of firm. It is not, therefore, unreasonable to press this Amendment and to ask the Government, as they found it impossible to make any concession in regard to the 40 per cent. grant for new plant, at least to grant the concession for which we are now asking, which will be an investment for greater productivity in industry in the years to come. Particularly will this be so from the point of view of the smaller firms which are trying to make themselves efficient in order to play a greater part in building up the nation's productivity and getting the country out of its difficulties. I hope that the Chancellor will give very serious consideration to the Amendment which was proposed by my hon. and learned Friend.

I realise the difficulty that hon. Members have in discussing this Amendment because we are tempted to go outside the scope of the discussion, as was my hon. Friend the Member for Scarborough and Whitby (Mr. Spearman). It is a little difficult to consider the effect of the Amendment without considering the basic rate of Income Tax and the effect on the whole issue of the 50 per cent. Profits Tax on distributed profits. I shall do my best to keep in order.

The whole conception of putting a tax on undistributed profits over and above Income Tax is stupid beyond all measure. My only objection to the Amendment is that it says, "forty-five" instead of "fifty." How is any business to carry on unless out of the profits which are not distributed there is available as much money as possible to buy new plant and pave the way for the development and
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rehabilitation which are necessary to British industry if it is to be prosperous and to continue to provide employment for the people? I am satisfied that if the present rate of taxation continues for another four or five years, great masses of firms that we now look upon as prosperous will just have to shut their doors because they will not have the cash with which to carry on.

That is the real issue. If the Chancellor of the Exchequer would spend a little more time studying company balances and less time studying the mysterious new principles of political economy, which frankly I do not understand, he would come to the same conclusion. It seems that we are going back to the principles of Ricardo, which I think were that a lot of gold and no goods makes for prosperity. That is what we have been doing for the past few years—and I expect that if I say anything more about Ricardo, Major Milner, I shall be ruled out of order. I thought I would say it while I had the chance.

The real problem for many companies is to find the ready money with which to pay their bills. There is a limit to which companies can go to the bank for overdraft facilities. The banks are usually considerate and reasonable. As their stock of notes is reinforced in a roundabout way by the printing presses of the Treasury we may, on an inflationary basis, go on for a certain time, until the whole show blows up.

I do not think that many hon. Members on the Government side of the Committee appreciate what happens. I have often talked on this matter to friends of mine and people who have voted for me. Some of them, who happen to be workmen, did not even understand that companies pay Income Tax. I was quite amazed to find this out in discussing the matter with a man the other day. As a matter of fact, 10 per cent. is piled on top of the 9s. 6d. in the £. There is the 10 per cent. Profits Tax on undistributed profits and from what is left we pay 9s. 6d. in the pound. It gets up to 11s. 3d., or something like that.

On much of the money that should be put on one side for the purpose of developing the business, a process which is every bit in the interests of the workers as it is of the shareholders, this appalling toll of taxation is levied. I see the hon.
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Member for Stoke-on-Trent, South (Mr. Ellis Smith). He and his fellow trade unionists are the main beneficiaries from industry. What businesses put to reserve is what he and other trade unionists depend upon. We have only to put the tax upon undistributed profits sufficiently high and there will be no more work for members of the A.E.U., because there will be no money with which to buy their products. That is what is going to face them and the whole country in a few years' time.

What amazes me is the moderation of this Amendment. It ought to have gone much further. Taxation on sums put to reserve is completely destructive of the whole basis on which industry has been built up in this country and in every other country. People may say: "After all, the Government will supply the capital that industry needs." I am very suspicious of any capital that the Government provide for any kind of business. They usually lose most of it. I have much more faith in what people provide out of their own pockets, because they watch it with much greater care. Let us be realists in this matter. I hope that the Chancellor will give the most serious consideration to this aspect of this Clause. I believe that, if we go on in this way, we shall in a measurable period of time have a major calamity in British industry.

I am on the executive committee of the National Union of Manufacturers and the other day I attended a meeting at which the gravest possible concern was expressed at the very high taxation which is now imposed upon industry. That union is composed mainly of small and medium-sized firms, and the members at that meeting said that they literally did not know how they would be able to carry on, for the reasons which have already been given by my hon. Friend the Member for Croydon, East (Sir H. Williams), and my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd).

I beg the Chancellor to give most serious consideration to the Amendment. With rising prices, it is essential to have more money in a business, and the Amendment will help to strengthen company reserves and enable the small and medium firms particularly to have greater cash reserves than they would
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otherwise have. The Chancellor of the Exchequer and other Members of the Cabinet have repeatedly asked for increased production. Increased production means more working capital, and if the Cabinet want increased production they must take steps to help the small and medium firms which have not the great resources of the big companies to enable them to achieve increased production.

The fall in the value of the pound and the rise in the prices of raw materials mean that more money has to be found, and these circumstances make it particularly difficult for the small and medium firms. At the meeting to which I referred, the very gravest concern was expressed by the small and medium manufacturers about how they would carry on if prices continued to rise and taxation continued to increase. A great part of the country's industry is the responsibility of these small and medium firms, and it would be a grave calamity if there were a collapse, for unemployment would be caused and the armaments programme and the export drive would be seriously jeopardised. I urge the Chancellor to give earnest consideration to this very reasonable Amendment.

I congratulate the Chancellor on the tremendous support he has had from his own benches in resisting the Amendment. It looks as if the Government supporters are either exceedingly bored with the whole debate and do not recognise its importance or that those who are here believe that there is nothing to be said against the argument of my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd).

One cannot always be expected to agree with the theory that lies behind the economic views of one's opponents, but it is right that one should recognise that in most cases there is a measure of logic behind the views of the Government, although we may not accept the bases on which the logic is founded. In this case, I am trying to find the logical basis for the imposition of this tax.

In an intervention the Chancellor implied that the reason for the tax was that all companies were making excessive profits and that they could, therefore, all be treated in a wholesale fashion. Nothing is clearer to people who know anything
1695
about business—I do not know if the three right hon. and hon. Members representing the Treasury in the Committee know the first thing about business and I am beginning to doubt whether their advisers do either—than that companies vary in their results, needs and structure. The fundamental fault behind the tax is that it treates all companies in a wholesale way as if their structure, needs, and results were identical.

4.45 p.m.

In this case the error seems to arise from the belief that all reserves are immediately applied in an inflationary fashion to capital investment which it is desirable in the national interest to limit. We cannot treat the question in such a wholesale way. If allowed to increase their reserves, certain companies might wish to employ them in a way which the Treasury might conceive to be harmful to the national interest. Others would employ their reserve in financing their day-to-day trade. At a time of rising prices, it is clear that every business thinking of buying and selling in a field where the rise in the cost of living is operative needs more day-to-day capital. I know that from my own business.

What is the result of preventing businesses from accumulating that capital by placing money to reserve? For the sake of argument, I am assuming that the companies to which I am referring are not those which are making astronomically increased profits. If the Chancellor looks into the matter, he will find a host of small and medium-sized businesses which are not making increased profits, or at any rate not largely increased profits. They are often the very ones which are called upon to accumulate more reserves in order to finance their day-to-day business. Very often their commodities are subject to Purchase Tax or to an increase in Excise Duty or something of that sort, and the result is that they have to accumulate the extra working capital by raising their prices.

I said that I could not understand the logic behind the Government's attitude towards Purchase Tax. I certainly cannot understand how the Government can in one breath deplore the rise in the cost of living and say that they are taking steps to restrain it and in another breath introduce measures of taxation which
1696
must inevitably force companies to put up the prices of their products. If ever there was a tax—here I may be going outside your Ruling, Major Milner—which was calculated to raise the cost of living, it is Purchase Tax. Although that argument applies to the whole tax, it applies particularly to the part of it which we are considering in this exceedingly restricted debate. I hope that we shall have not merely the Chancellor's professional view about this. I hope the Chancellor will reinforce himself with the views of the hon. Members behind him. Many of his hon. Friends who are garrulous, if not eloquent, are wrapped in a sphinx-like silence. Can it be that their emotions are overwhelmed by loyalty to the Chancellor and that they have nothing to say?

I am sure that the whole Committee is grateful for the hon. and learned Member having so kindly resolved what he conceived to be the dilemma of his colleagues. I assure him that we have grasped the purpose of this Amendment, and if we have not put it in words of one syllable for him to attempt to understand, it is because we paid him the compliment of assuming that he and his colleagues understood it perfectly well from the start. I hope that we shall have the views of hon. Members opposite, and I shall be much interested to hear what the Chancellor of the Exchequer has to say.

It may be for the convenience of the Committee if I now reply to the Amendment. The hon. and learned Member for Wirral (Mr. Selwyn Lloyd) devoted almost all his time to discussing the Clause, and it was not until the last two or three minutes that he spoke directly to the point in question, which is the relatively narrow
1697
proposal that the relief for undistributed profits should be 45 instead of 40 per cent. or, the other way round, that the tax on undistributed profits should be reduced from 10 per cent. to 5 per cent. It is to this narrow point that I shall address my remarks.

First, although hon. Gentlemen opposite have dismissed the point, it is important to start by recording that this Amendment would cost net, after allowing for the Income Tax point—in a full year £33 million. When one considers the other proposals already made by the Opposition which would lose us revenue, this is a point that must not be overlooked.

That was argued by my right hon. Friend either in the Budget debate or on the Second Reading debate. As far as we are concerned, nobody on this side of the Committee will even begin to contest the view that undistributed profits are a very important form of corporate savings. However, no one has sought to demonstrate that if this reduction were carried out, the amounts involved would be put to reserve. They might be in a number of cases, but in the form which this Amendment takes it by no means follows that this would result.

If a company saves on its tax, what it then does is a matter for it to decide. It does not follow automatically, as hon. Gentlemen opposite assume, that moneys saved in this connection will be put to reserve. The Committee will recollect that when the right hon. Gentleman the Member for Warwick and Leamington (Mr. Eden) last year introduced a new Clause, he devoted a good deal of his remarks to this point and claimed that the new Clause was so designed as to cover the point I am now making.

I think that the Economic Secretary is on an extremely misleading point, if I may say so. Undistributed profits may not technically be placed to reserve, but they must increase the capital liabilities of the company. What really matters is whether they are to be spent in ways which are desirable or not. Whether they are technically carried to the credit of profit and loss or whether they are placed to an earmarked reserve is quite beside the point.

Would the hon. Member permit me to interrupt again? We are talking about a profit balance and, if it is a profit balance, it is inevitably reserve if it is not distributed. There are only two things one can do with a profit balance: one can either distribute it or retain it. If it is retained it is inevitably a reserve. One cannot get away from that.

I think the hon. Gentleman is confusing the issue of cash with the issue of profit and loss account, which is quite separate. If a company has cash, it can spend it. If it has a
1699
balance on profit and loss account it can either distribute it or put it to reserve. There is no alternative.

I am grateful to the hon. Gentleman, but I still think this is a factor which any board of directors would have to take into account. May I now go on to the next point I want to make? I said earlier that undistributed profits were an extremely important form of corporate savings, so important that we felt it necessary to increase the rate of tax on distributed profits as a deterrent. The gap is now much wider between the tax on distributed and the tax on undistributed profits, and to that extent we may say that the inducement for companies not to distribute profits is so much the greater.

As the debate went on, it interested me to see that the Opposition have entirely changed the argument from that advanced in June, 1950, when a new Clause to the Finance Bill was moved by the right hon. Member for Warwick and Leamington. Then, as hon. Members will recollect, the whole burden of the case of the right hon. Gentleman was that it was necessary to enlarge the gap between the tax on distributed and the tax on undistributed profits. This afternoon we have heard from most hon. Members opposite speeches which seemed to try to combine the view, on the one hand, that the tax on undistributed profits should be lower with, the view, on the other hand, that the tax on distributed profits should be lower.

The hon. Gentleman who opened this debate seemed to be arguing something that, in terms of the speech of his own leader last year, was quite inconsistent and contradictory. Because, if it is said that we must provide the maximum of inducement and the maximum of encouragement for people to put as much as possible to reserve, not to distribute their profits, then clearly the gap between the rates of tax on undistributed and distributed profits is extremely important. The right hon. Member for Aldershot laughs but, if he will look up the speech made by his right hon. Friend, he will find that throughout that speech he was saying, "Please do not misunderstand us. All we are trying to do in this new Clause is to widen the gap between the rate of
1700
tax on distributed and the rate of tax on undistributed profits."

That is perfectly true, but one would not have supposed so from listening to the hon. and learned Gentleman, because he spent 90 per cent. of his time this afternoon saying that the rate of Profits Tax was too high and only in the last two minutes did he say, "Therefore, I want this Amendment which will reduce the rate of tax on undistributed profits." All I am saying is that last year the argument was—widen the gap. This year, I expect we shall see when hon. Members talk on the question that the Clause stand part that they will not only be arguing that the tax on undistributed profits should be lower but also that the tax on distributed profits should be lower as well, if what they have said already is anything to go on.

It is quite clear that I did not make myself plain to the hon. Gentleman; that, obviously, was my fault. What my whole argument sought to prove was this. I left out of account the 50 per cent. I assumed for the moment that that was to be the rate of tax on distributed profits, and I sought to prove that because dividends would not be reduced that extra tax must come out of corporate savings. That is why I sought to diminish the burden on corporate savings which would be the result of the acceptance of the Amendment.

If that is what the hon. and learned Member was saying, I did not understand it. I am glad, however, to know that he is supporting the proposal that the tax on distributed profits should be 50 per cent.

Whatever may be said against the maintenance of the 10 per cent. tax on undistributed profits, no one, I think, can say that the effect of it is to reduce the volume of savings. It merely alters where the savings are; it does not reduce them. Moreover, I do not see how any hon. Member can argue that in present circumstances the maintenance of
1701
this 10 per cent. tax would result in a lower level of investment than would be the case if the tax were reduced to 5 per cent.

Anyone who knows anything about present circumstances would confirm the view that the difficulty at present is to get the plant, the equipment and the buildings and that, generally speaking, although there may be isolated examples to the contrary, it is not lack of financial resources, but lack of physical resources, including manpower, that is holding up an enlarged investment programme. After all, the argument has been advanced by hon. Members opposite that we cannot have the development, the re-equipment and so on, that we need unless the Amendment is carried. I assert that there is no reason whatever to suppose that the continuation of this tax at the level of 10 per cent. would mean any less investment being undertaken this year than would be the case if the Amendment which has been moved by the Opposition were carried.

Further, we have to consider what this means in terms of its effect. Although it is in a sense extremely limited, there can be no denying that this proposal, if carried, would mean a small redistribution of wealth in favour of one section of the community. It is limited, I know, but it would have consequences as a whole which would be much greater than the proposal itself. The consequences would be out of all proportion to the amount involved. It would—I speak seriously on the point—be highly provocative.

I will explain. I am not concerned to argue that it is directly inflationary, but I am concerned to argue that it is indirectly inflationary. If by inflation we mean an expansion of money to spend relative to things to buy, we have to consider, first, what would be the effect, should the Amendment be passed, on all other sections of the community in their attitude to claims for higher money incomes. In my view, it would be provocative of action on the part of other people—wage earners, salary earners and the like—to get more money.

Secondly, it would be indirectly inflationary in another sense, namely, that it would, I believe, have an effect on morale and on output, for we have to remember
1702
that anything that reduces output is just as inflationary as anything that increases purchasing power. I believe that if the Amendment were carried, we should find that throughout the country people would say, "At this particular time in our economic affairs the Opposition come along and say, not that we should maintain the rate, but that we should actually reduce the rate of tax from profits." I believe that the social consequences of that would have economic results which would be very bad for the whole of the country.

Hon. Members opposite must not take a narrow and limited view on this matter. Anything that, in present circumstances, went out to the country as a move on the part of the Opposition, or on the part of the Government if the Amendment were accepted, to redistribute wealth in a particular way at this moment against the community generally and in favour of a relatively small section—I know it is a very narrow point—would have social consequences out of proportion to the act itself.

That is not the point. I thought that the hon. and learned Member was talking about the tax on undistributed profits. This would be a reduction in the tax on undistributed profits. [HON. MEMBERS: "No."] But that is the point of the Amendment.

The Opposition are seeking to reduce the existing tax of 10 per cent. to 5 per cent. This is not a new tax; it is already in existence. All I am saying is that although the amount involved may be small—say, only £33 million over the whole economy—it would be regarded, I believe, as provocative. Therefore, on revenue grounds, we cannot possibly afford to give up the £33 million involved.

I do not believe it is necessary in our present economic circumstances to stimulate corporate saving in the way that that
1703
is proposed, and finally, I re-assert that it would be highly provocative and would be likely to have serious economic and social consequences. For those reasons, I ask the Committee to reject the Amendment.

The reason we put forward the Amendment is that the Profits Tax has become partly a capital tax. Owing to the rise in price the capital of companies is not being maintained. Their profits are calculated upon the old basis of the costs of replacing their assets being the same, when they come to replace them, as when they bought them. It follows that a very large part of the present profits of companies are not true profits at all, as my hon. Friend has said. The tax falling upon that part of their profits is actually falling upon capital. That is why we have singled out, as a means of mitigating this, the part of the tax which falls on undistributed profits.

Before going on to answer the Government's case, I concede the point which was disputed between the Economic Secretary and some of my hon. Friends. I think the hon. Gentleman is perfectly right that any alteration in one or other of the rates of Profits Tax may cause some difference in decisions about dividends, but I do not think that that in any way changes the main basis of our argument.

The Government have talked very much about the investment programme, and I dare say by and large they are right that if the Amendment were carried not much more investment would be done in the present financial year than if it were not carried. Although as they themselves have said that the result of the whole of the Clause would be to check investment and to add £30 million to corporate savings, they are on very thin ground when they single out the undistributed Profits Tax and tell us that if it is cut in half it will not be contributing anything towards the figure of £30 million saved. But even granting the Government that, the big difference between this year and last June, when we were discussing the tax, is precisely the need for working capital which has grown so important in the interim. That change is clearly reflected in the Government's own White Papers.

1704
Businesses which had, say, £1 million worth of raw materials a year ago and have been steadily manufacturing those materials, and yet at the end of the period—today—want to retain the same volume in their storehouses, have for this purpose to find an enormously increased sum in cash. It is precisely because we do not think it is in the interests of any section of industry, whether it be the shareholders, the workers, the managers or, indeed, anyone, that British industry should run short of working capital, that we believe this to be a really genuine and sound proposal.

If it happened to be provocative in its effect upon the wage earners and made them demand higher wages, that would be a tremendous failure on the part of the Government and ourselves. It would show that we had not explained the simple facts of carrying on business through a period of rising prices. We ought to be ashamed of ourselves if in our own factories we cannot make so simple a process clear to our workpeople as the increase in working capital that has to be tied up when raw materials, plant and work in progress are all going up.

As my hon. Friend said, the effect is especially serious for small companies whose borrowing powers—although they may have had a very fine record in the past—are not adequate to the needs of the company. There will be many cases where businesses will draw in their horns for fear of being short of cash and for fear that the bank, under general directions and a policy of credit control with which I agree, will be very sticky in giving credit.

These things can only be found out after they have happened and the damage has been done. That is why in our submission it is far better that industry itself should be able to finance its working capital to the greatest possible extent. In my opinion many of those companies which have raised their dividends in the last three months ought to have reduced them. As a matter of fact, so great has been the rise in costs of replacements that, had they set aside from their profits adequate reserves against these costs of replacement this action would have caused them to reduce their dividends. The fact that they did not do so, or that they maintained their dividends, is merely part of the general ignorance of the system under
1705
which we all live. It is true that a company's credit suffers if they do not maintain their dividends. They may some time in the future want to borrow more money, and therefore the general practice of a prudent board of directors is to maintain their dividends if they possibly can.

That is true, and it is also true that British business would suffer if dividends were reduced all round. So in many cases companies have accepted what they know to be wrong, namely, that the profits their accountants have told them they have made are true profits. They know very well they are not true profits. There is really only one end to taxing unreal profits. If the process goes on we shall bleed British industry of its working capital. It requires the united effort of those on the management side of industry and those who advise the workers in industry to comprehend and inculcate what is happening to liquid capital in this country today. It is a matter which should be taken out of politics because it is going to affect our standard of life for a very long time.

5.15 p.m.

Another reason why the proposal in the Amendment would be of the greatest advantage and why we should try to strengthen the reserves of business is that the terms of trade have gone against us and they will not recover, at least not for some time. We shall have to export more manufactured goods to get food and raw materials than we have done before. We are not going to be able to do that without lowering the quantity of goods available for our people at home unless company reserves are maintained and put into increasing the efficiency of plant and equipment. A very serious situation will arise unless our productivity is kept up. It is high time we ended the process of bleeding industry which, after all, pays for our bread and butter and all our system of social security. Therefore, I cannot believe that it is right to push the taxation of company profits as far as this.

If I might give the Committee an example, a company which distributes half its profits, if the Clause is accepted without amendment, will find that out of every £100 profit it makes it can retain only £10 10s., that is, only 10½ per cent. of its total profits. That is all that it can retain if for one reason or another
1706
it decides to distribute half. That is not enough to finance the rising cost of its stocks and replacements. The Chancellor will say that it ought not to distribute half its profits and I agree, but there is a limit beyond which one cannot go in retaining undistributed profits, for when that limit is passed the company's credit suffers.

The Economic Secretary to the Treasury was saying that this Amendment would be provocative. The Clause will take £60 million more out of profits this year than last year through this tax. If the Amendment is carried, that £60 million, roughly speaking, will be cut in half. Is it not an absurd thing to say that the amount of money which will placate wage earners and prevent them from asking for more wages can be fixed at £60 million, but that they will all ask for more wages if the amount is reduced to £30 million? There is no question of reducing Profits Tax as a whole under the Amendment. I hope that the Government will think about this again, because every year we put off strengthening company reserves means that there is coming a surgical operation of more and more severity.

I must say that on one of the most important Clauses in the Finance Bill, and after a very serious speech had been made by the opener of the debate on this side of the Committee, we really are entitled to arguments of greater substance from the representative of the Treasury Bench who purported to make a reply to some of the points which we made. I was astounded to hear him say that undistributed profits were not necessarily reserves. Bless my soul, at the end of the year when we decide how much—

I think that if the Economic Secretary takes the trouble to read HANSARD tomorrow, he will not dispute that I am being accurate in what I now say. What happens when the balance of profits which are not to be distributed during the year are dealt with is that they are carried forward and, whether part of them is carried to a revenue reserve fund or merely left in the carry-forward, they are reserves precisely the same. If the
1707
hon. Member will look at balance sheets produced under the new form required by the 1948 Companies Act, he will see that capital reserves and revenue reserves have to be set out separately, and the carry-forward is included under revenue reserves. These are just the simple facts.

There was another argument which really shocked me. It was that one could not get machine tools, or buildings or this and that at present—they are all in such short supply—and therefore, the argument runs, "You do not need the money and you may just as well let us have it." I sometimes wonder whether today we have statesmen who merely look at the position as it faces us at the moment and never look forward. I should have thought that this is an artificial period through which we are passing, both so far as trade is concerned and the demand upon our productive resources due to re-armament.

The problem of the future is causing the greatest concern in the United States among all men who think and look ahead. My latest information, which is only 48 hours old, in communications I have received from America, is that the industrialists are getting extremely worried about what is happening there. They can foresee that as soon as re-armament comes to an end, there is bound to be, in American trade, a very severe slump. I have not heard the contrary view expressed by any well-informed American industrialist. We must anticipate that if that happens in America we shall inevitably feel the full disastrous effect of that here.

We all want to maintain full employment, but one of the gravest risks of bringing about very serious unemployment in this country is to run down company reserves, a matter which the Treasury ought most seriously to consider. Their policy now may be responsible for unemployment in the not-too-distant future. The way to do what we can to avoid that risk is to make sure that our companies are so financially sound and have been able to accumulate such adequate reserves that they are in a position to weather the storm, carry on and keep their people employed as far as practicable at a time of slump, which sooner or later we may be called upon to face.

I wonder if the hon. Member experienced what happened in this country when the last big American slump took place in America in 1929. If he remembers that experience, it will answer his own question.

My point is that anything that can be done to strengthen the financial reserves of our companies to face dirty weather is absolutely vital. That is the case whether the companies be large or small, and I agree with all that has been said about the vast number of small undertakings in this country upon which our industry and employment so largely depend.

What the Chancellor is doing by the increased Profits Tax with which this Clause is concerned, only a part of which we are trying to reduce, is to weaken the economic and financial structure of our industry. If the right hon. Gentleman is to show real statesmanship, he ought to examine this matter more carefully and see to what extent he can meet the case that has been made.

I agree that this Amendment deals with a fairly narrow point to which I shall confine my few remarks and keep my more general arguments until we debate the Motion, "That the Clause stand part of the Bill." The Economic Secretary is very popular in the House. He is very assiduous and very courteous. I hope that he will not take it amiss if I say to him that today he was very assiduous and courteous but he could not make any semblance of a case. I have seldom heard thinner or more contentious arguments being advanced from the Treasury Bench. I will run through them.

The first point with which I shall deal is that about which my hon. Friend the Member for Stockton, South (Sir A. Gridley) spoke. We have heard a great deal about the purpose of this Profits Tax being to prevent undesirable capital investment. The Economic Secretary gets up and says that that has nothing to do with the question, and that financial resources are not concerned. He next said that, of course, the effects of any increased dividends or company profits are out of all proportion to the figures involved. It is using a well-known dialectical trick to say "I cannot possibly explain the ratio of 10 to one which exists between the rise in wages and the rise in
1709
profits, but I put that on one side by saying that the facts are affected out of all proportion to the figures."

The Economic Secretary said that such dividends would be provocative. I hope that he will forgive me if I say that I have never heard a more shocking argument. If we are to try to govern the country to the best advantage, we must be prepared to face doing what may be provocative or not for some reason to some people if it ought to be done. As my hon. Friend the Member for Chippenham (Mr. Eccles) said, to say that it is provocative to take £15 million but not provocative to take £30 million is hardly an argument to be expected from the Treasury Bench. The Economic Secretary was floundering about in a subject with which he was only faintly familiar and about which he was not very well informed.

I turn to what the Economic Secretary had to say about the gap between distributed and undistributed profits. All my right hon. Friend's arguments last year were intended to show that if the gap was widened between distributed and undistributed profits that would be a desirable result. That is perfectly true, but to continue that argument, whatever the rates of taxation are, is to reduce it to nonsense. The gap can be widened by increasing undistributed profits to 20 per cent. and distributed profits to 80 per cent. but those are the arguments of the debating society in a public school and are quite unworthy of a Committee of the whole House.

What the Economic Secretary says is that if he is to ride the taxpayers' horse, the hind legs of which have foundered, we will widen the gap between his forelegs and hind legs by breaking the forelegs. That argument, at the beginning of Ascot week, shocks me very much. If it were not for the fact that we shall have an opportunity of getting further replies from the Chancellor on the Motion "That the Clause stand part of the Bill," I should have to develop my argument still further.

With regard to the matter of depreciation, which I shall also develop on the Motion "That the Clause stand part of the Bill," I will give now just a personal instance. When I came to look at the profits of my own company, after making a careful study, I added to the
1710
figure for depreciation of about £850,000 which we normally write off against our plant and buildings, a further £900,000 this year. Fortunately, we had a large enough business and large enough profits to do so. What I am saying is that out of what we made £900,000 was not true profit.

5.30 p.m.

That is a long established and mature business. The worst feature of this tax is that it hits the developing business, because the mature business has been in existence for say 30 or 40 years and has enjoyed more sensible financial management and has had the opportunity of writing down its plant; and of accumulating, not only paper reserves but perhaps cash reserves, although they have been run down recently.

The people most hit by this rise in the Profits Tax are the people whom it is most desirable should accumulate undistributed profits, people who are running a developing business and one perhaps started since the war. Unless we are to get not only the maintenance of plant and equipment in a modern state but also expanding industrial production from new processes and new sources of production, the economic problem of this country will be insoluble. I must say that on a matter of this importance the case advanced from the Treasury Bench is altogether too thin to commend any acceptance from this side of the Committee whatsoever.

I thought it had been agreed to end the discussion on this Amendment, so that points which I understand are of more importance might be better discussed on the Motion, "That the Clause stand part of the Bill." It will then be open to hon. Members to speak on that Question.

With respect, Major Milner, such very strongly worded
1711
advice from the Chair to hon. Gentlemen not to rise does come very near to making the Closure the business of the Chair, and it is very difficult for hon. Members who feel it their duty to their constituents to say something to accept that advice without any assurance that the Treasury Bench will not move the Closure at the next stage before they have spoken.

Then of course it would be a question as to whether the Closure was accepted. The question of Closure does not arise here at the moment. I am appealing to the Committee to come to a decision on a comparatively minor point.

You were good enough, Major Milner, to advise the Committee that the debate on this particular Amendment might now come to an end. You went on to say that the arguments would be better deployed on the Motion, "That the Clause stand part of the Bill." I am sure it would affect the decision of hon. Members who are trying to catch your eye now if they had some assurance that they will not be gagged.

All I, can say is that hon. Members must leave it to me, having regard to the circumstances, to ensure that there is a reasonable debate on the Motion "That the Clause stand part of the Bill." I am not under any obligation to accept the Closure from any quarter of the Committee, and therefore I hope that the Committee will be good enough to leave it on that basis.

May I submit to you, Major Milner, that arguments in favour of this particular Amendment are, in my submission, by no means exhausted, and are, moreover, more relevent to the issue now before the Committee than they would be to the Motion "That the Clause stand part of the Bill"?

Some of us have been sitting here hoping to take part in this debate, but because the debate on this Amendment did appear to be very narrow and it was thought that arguments would be better deployed on the Motion "That the Clause stand part
1712
of the Bill," we have kept silent. However, the debate has taken rather a wide turn, and if it is continued I would ask whether we shall be able to debate it on as wide a basis as it has been so far.

I wish to add my emphatic protest against the speech of the Economic Secretary to which we have just listened in respect of one point, not, I think, referred to by subsequent speakers. He used the phrase, "redistribution of wealth" in connection with the effect of the Amendment which has been moved. I wish to protest that such a prejudicial idea should be injected into what ought to be a perfectly businesslike proposition.

It is most unfortunate that we should have from the Treasury Bench the argument that one could affect the resources of industry either for good or for ill without affecting those who work in industry and without affecting the consumers who depend on the products of industry. If there is, as I hope to show, a genuine need for further capital in industry, and an Amendment is carried which will have the effect of adding to it, to say that by so doing we shall injure the interests of the workers in industry is nothing but malicious party propaganda.

The Chancellor has told us that, at any rate so far, there is no evidence of a shortage of working capital in industry. I wish to show how, in my submission, the lack of such evidence in the past can be reconciled with the perfectly genuine case put forward from these benches that the time has come to ensure that the depletion of working capital in industry is not allowed to go on. I am prepared to admit that there is considerable evidence, such as over-subscription of new issues and the Chancellor's own need to cut down capital investment, which might, taken at first sight, lend colour to his argument that there is really no need to worry under this heading.

I would put forward an aspect to refute that argument. First, there is the cumulative effect of a variety of changes brought about in this Finance Bill, no one of which might be fully effective, but which taken together must have a really marked effect. We have the sixpence on the Income Tax which affects the situation to the tune of £114 million. We have the situation of
1713
untrue profits being taxed, the measure of which it is very difficult to assess, but which I am prepared to submit is not less than £1,000 million. We have the increased price of new plant, for which there are no adequate reserves, and the increased value of stocks which have to be financed out of current resources.

In addition, we have the effects of the initial allowance amounting to some £170 million which adds further to the situation. There is this point in that connection which has, so far as I know, never yet been referred to. While this initial allowance, it is quite true, is a tax-free loan, yet is is to enable the company to put plant down and produce goods thereafter and have some productive plant with which to meet the interest burden when it comes, in contrast to the raising of new capital the interest on which must be provided before the benefits of the new plant are available. Finally, we have the effect of the new Profits Tax on the situation.

Taking all those together, I calculate that, just at the time when finance for new stocks and for the replacement of plant, amounting to some £1,400 million is needed, capital is to be depleted by stopping initial allowances, and by more Income Tax and Profits Tax to the tune of some £350 million. So we have an adverse position, taking the two together, of something like £1,750 million.

Coming back to the point I was making about the Chancellor's claim that the trouble is not yet evident and therefore there is no need to worry, I submit that if the Government of the day concern themselves solely with what has already happened and do not attempt to foresee what will happen in the future, it is small wonder that our financial situation is a worry to so many of us. Anybody can analyse the past after a little study, but it takes a statesman to foresee with accuracy what lies ahead.

The truth of the situation is partially obscured, because the very fact that we have inflation goes some of the way to meet the situation in regard to working capital. Profits are automatically swollen by the effect of inflation, which is what caused the trouble in the first instance. Therefore, we have the paradox that the disease creates in small measure a remedy for the trouble. But that will stop as soon as the inflation stops. We also have
1714
the situation that, whereas the private investor is largely being replaced by institutions, it is the institutions, particularly the insurance companies, which are at present benefiting largely, compared with others, from the effects of inflation. There we have an artificial gain from an inflated situation to this position of working capital, and this obscures the truth.

Then we have the reason given by the Economic Secretary that manpower and materials are very short. That, again, tends to conceal the need for further working capital in industry, but the very fact that they cannot spend it is no excuse, as the Economic Secretary suggested, for taking it away from them. If they do not need it immediately, because they cannot spend it and because of manpower and material shortages, they will need it some day. It would be much better left in the undistributed reserves of companies until the day when it is really needed.

The effects of a number of these provisions affecting company reserves are not felt immediately. That tends to obscure the situation, which I find it difficult to believe is not really known to the Chancellor and is not really accepted by him. It just happens not to suit his book at present to acknowledge it. I beg the Committee to accept the view that one cannot damage British industry without damaging the people who work in it. I do not know how far this depletion of British capital will go, but it would be a great tragedy if the only source from which adequate funds—

I was coming to the end of my remarks, but I submit that this Amendment, which is designed to increase the reserves of British industry, must be considered in the light of the comparable impacts on British capital of other things which have happened. I do not propose to pursue the matter any further. I have dealt with each point very rapidly. I only hope that in considering this Amendment, which will have the effect in some small measure of encouraging the maintenance of reserves, and so of modern and up-to-date plant, we shall not reach the stage before something is done when the only
1715
source from which adequate funds can come is the British Treasury. However unpopular and ineffective nationalisation may be, I hope that we shall not find a crippled industry obliged to accept that doctrine because they cannot get finance in any other way.

§
the other side of the Committee except that of the Economic Secretary, who, in purporting to reply to the debate, read a brief prepared long before. We have had no cogent argument against this Amendment, and I submit that the Committee is entitled to one.

I beg to move, in page 16, line 37, at the end, to add:
(3) This section shall not apply to any body corporate, unincorporated society or other body, the trade or business of which consists wholly or mainly of the ownership or provision of dwelling houses for letting where not less than seventy-five per cent. by number of the dwelling houses so owned or provided are dwelling houses, the rents of which are controlled under or by virtue of the Rent and Mortgage Interest Restrictions Acts.
I do not propose either to repeat the discussion which has taken place upon this matter of the Profits Tax increase generally or to anticipate the discussion that we now understand will take place on the Question, "That the Clause stand part of the Bill." I should like, however, to refresh the memory of the Committee by pointing out that, in his Budget speech, the Chancellor's main arguments for this particular increase were, firstly, that he
1720
had to fill a gap of £150 million between his revenue and his expenditure, and, secondly, that this particular proposal would prevent the inflationary pressure which has already arisen from being given fresh impetus as a consequence of increased dividends.

As to the first of those propositions, may I point out that the suggestion which this Amendment embodies would cost very little indeed? The relief which would be given would be considerable, but the cost to the Revenue would not be very much. As to the second of those propositions—the inflationary argument—while I can understand the reasoning of the right hon. Gentleman, I cannot agree with him. Even if one does accept it, one ought to ask whether that principle should be generally applied, or whether there should be certain exemptions in certain special cases.

1721
If the object of this particular increase in the Profits Tax is to prevent inflationary pressure by reducing the distribution of cash which is going to find its way into the pockets of shareholders, surely, it ought to be limited to cases where that does happen or is expected to happen? If the social or economic object which the Chancellor has in mind is to control profits, what is he going to do about cases where profits are already Statutorily controlled?

6.0 p.m.

The object of this Amendment is to deal with such a special case. It is intended to provide exemption from this increase for the property-owning company, the bulk of whose income is derived from rents controlled under the Rent Restrictions Acts. May I remind the Committee that there are two particular forms of rent control still in existence in this country. First, there is the control imposed under the Rent Restrictions Act, 1920, which pegged rents at the 1914 level, and, since 1920, those rents have been allowed to rise by only a very limited degree in order to meet certain increases in rates, in the cost of improvements, and so on. The actual increase is very small indeed. The second type of control is the 1939 control, which pegs rents at the 1939 level. Since 1939, those rents have risen by only a small amount in each case to correspond with the increase in rates which may be payable.

That is the limitation which the law already imposes upon the income which property-owning companies can draw from their properties. But while from that point of view their incomes are limited, their expenses certainly are not. Their costs for repairs and maintenance, and for the provision of new houses to replace those which become derelict, are substantially up on what they were, firstly, in 1914, and, secondly, though to a lesser extent, in 1939.

If, in fact, more is going to be taken by the Government in the form of Profits Tax out of the money available as revenue to those companies, then, obviously, there will be very much less available to them for renewals and for the repair of their existing houses. I put my case no higher than that. I say that if, in fact, this exemption is not granted, the effect on a company which draws the bulk of its revenue from properties, the rents of which are controlled under
1722
the Rent Restrictions Acts, will be to diminish the amount they will have available for new investments, for the provision of new houses and for the improvement of their existing ones.

Hon. Members should consider whether or not the Chancellor's strictures upon the increases in company dividends apply to property-owning companies. With their income controlled, their dividends are already automatically limited. When in his Budget speech the Chancellor said that in 1950 dividends were up by 14 per cent., that certainty did not apply to the property-owning companies. Their dividends are maintained at the same level or are sometimes even reduced, because the money is just not available. I apologise for the fact that I must burden the Committee with some figures, but I think it important that hon. Members should have before them certain concrete and detailed examples of how this proposal is going to work.

I want to give one example of a company which I will call "A" Limited. "A" Limited is a property-owning company, 93 per cent. of the houses it owns being subject to the Rent Restrictions Acts, either the 1920 or the 1939 control. In 1946, they paid 5 per cent. National Defence Contribution, which was, of course, the predecessor of the Profits Tax which we are discussing this afternoon. The net amount paid by that company for N.D.C. in 1946 was £6,887. In 1951–52, at the proposed new rate, they are going to pay £41,464, an increase of £34,577. That is the effect of this particular proposal upon the income of that company, an income, let me remind the Committee, which is maintained absolutely at the same level and which cannot rise because the rents are controlled.

Let me give another example. For convenience, I will call this company "B" Limited. In 1946, "B" Limited also paid National Defence Contribution at the rate of 5 per cent. The total paid in that particular form of taxation was £1,100. On top of that, the company paid £9,600 net in Income Tax, a total for that year of £10,700. In relation to their profits, that was quite a high level of taxation even then, because their chargeable profits were £23,545. In 1950, their Profits Tax was £5,000 and their Income Tax, £9,500, a total tax liability of £14,500.

I was just going to give the comparable figure of the chargeable profits. They were not more but less than in 1946. The figure was £20,800.

What is going to be the position under this new proposal? Assuming, for the moment, that their profits are going to remain the same in this new year as they were last year, their Profits Tax liability will be £7,800 and their Income Tax liability £10,100, a total of £17,900. That means that in this coming year they are going to pay in total tax £17,900 as against £10,700 in 1946, an increase of £7,200 on a smaller profit. I cannot see that that is fair.

Let me emphasise again that the dividends in the case of "B" Limited have been constant over the period I have been reviewing. The rents of the great bulk of their properties are controlled at the 1914 or 1939 levels and their repair costs have gone up two and a half times since 1939. Those are two examples indicating what I have in mind regarding this Amendment.

No, I do not think so, because I am satisfied from personal investigation of the facts which this company have been good enough to furnish that their properties have always been kept in tip-top condition. This company is one of the very best of its kind. I have, and I am sure my hon. Friends have, a number of examples regarding other companies, but this, as I say, is one of the best property-owning companies in the country, and that is one of the reasons why I have not chosen to give its name to the Committee today. I do not think I should give openly the particulars about
1724
a company which has been good enough to furnish me with them.

Hon. Members will see that there are two major tests which I propose to apply. Obviously, if I were merely to say that exemption from this particular tax increase should be given to any company which owned rent-restricted property, that would open the door to widespread evasion. That is not my purpose. My purpose is to try and remedy what I consider to be a hardship and what, I hope, the Committee will also consider to be a hardship.

I propose two tests. Firstly, to gain the exemption suggested, the company should be one carrying out a business consisting wholly or mainly of owning or providing dwelling-houses to let. The second test is that of the houses they own and which they have put out for letting not less than 75 per cent. must be properties controlled under the Rent Acts. Of course, not all houses owned by every property-owning company are exclusively controlled properties. Some companies have service flats where rents are not necessarily controlled and others may engage in furnished letting. Others may have investments, such as stocks and shares. But what I am concerned with is the property-owning company proper. I am not wedded to that 75 per cent., and if the principle were accepted I have no doubt agreement would be quickly reached on what should be a fair yardstick. But it is the principle I want the Committee to accept today.

I hope the Government are not going to approach this matter in any kind of hostile spirit. I hate to make what may seem a controversial point, but sometimes one gets the impression that a kind of spirit of anti-landlordism infects them. I hope they are not going to look at this particular matter in that light. They must realise, as many on this side of the Committee realise, that for better or worse the bulk of dwelling-houses owned and occupied by people in this country are still under private ownership. We know the picture is changing very fast, but at the moment private ownership still controls the vast bulk of properties in this country.

Companies such as I have in mind in this Amendment provide what I consider to be an important national service to the people of this country. I feel the case
1725
which they have, and which I have endeavoured to put forward, for what they consider to be a fair and just relief is one which ought to be granted and one which, if granted, will give them a great deal of encouragement to carry on with this important work.

I want to speak briefly in support of the case which has been so clearly put forward by my hon. Friend the Member for Henley (Mr. Hay). Perhaps at the outset it is proper that I should declare an interest in this matter. I want to refer the Committee to a sentence or two from the Budget speech of the Chancellor when he was dealing particularly with the reasons which led him to increase the tax on distributed profits from 30 per cent. to 50 per cent. This is what the Chancellor said on 10th April:
But it is one thing to recognise the justification for profit in the case of the individual firm as a reward for efficiency—perhaps with an element of luck thrown in; it is quite another to ignore a situation where, by reason of the general economic climate and not through the aptitude of individual managements, the whole level of profits, and the share of the national income taken by it, is rising. Unfortunately, in recent months not only have profits gone up, but dividends have risen too, and I have little doubt that unless some action is taken this process will continue and may even gain momentum."—[OFFICIAL REPORT, 10th April, 1951; Vol. 486; c. 854.]
We have within that paragraph a clear statement of the considerations which led the Chancellor to increase the tax on distributed profits. First, there was the fact that profits generally had increased owing to the economic climate of the nation, and secondly the fact that many companies had increased their dividends.

6.15 p.m.

My submission is that in the very limited type of company we are seeking to exclude neither of those considerations can apply, and in fact neither do apply. I want to examine for a moment those two considerations as applied to the companies owning solely or mainly properties where the rents are controlled by the Rent Restrictions Acts. First, is it possible for the profits of such companies to increase? It is quite clear that they cannot. The gross receipts are controlled at the 1939 level, subject only to an adjustment to cover increased rates, while their outgoings are very greatly increased. Taking perhaps the main item of outgoing which
1726
usually applies, namely the cost of repairs borne by the landlord, certainly no one is likely to quarrel with the statement that the cost of repairs is two and a half to three times as great as it was pre-war.

There is also the fact that in a great many cases the landlords provide services in addition to doing repairs. Where the landlord has the obligation to provide a hot water supply and central heating the cost of fuel today is at least three times the pre-war cost. Where the landlord employs porters, cleaners and other servants their wages are two to three times what they were before the war. Therefore, in this particular type of company, gross receipts are pegged at the 1939 level, whereas outgoings borne by the company have undergone a great increase. So, if we applied the test of the first of the Chancellor's conditions, there can be no increase in profits in the case of such companies.

On the question of whether such companies are able to increase dividends, I think it follows that if profits are not increased it would be only an exceptional case where the dividend could have increased. I have taken the trouble to examine this matter in some detail over the range of a number of principal companies that seem to me to fall within the provisions of the Amendment. I have taken 24 of the largest and best-known companies of which particulars are to be found in the Stock Exchange list, and I find these interesting facts. Of these 24 companies, 19 are paying smaller dividends today than they were paying before the war. One is paying the same dividend as it paid before the war, and four are paying larger dividends.

Therefore, as far as the generality of practice is concerned, companies of this particular type are paying out in the aggregate less in dividend today than they paid out before the war. It follows that under the second test applied by the Chancellor these companies clearly cannot be brought within the proper scope of the increased Profits Tax, because they are not paying increased dividends but in the generality of cases are paying smaller dividends.

I should like to make this further point in connection with my examination of the dividend record of these 24 companies, and that is that not only is it true that 19 of
1727
them are today paying smaller dividends than before the war, but during the war every one of the 24, owing to the difficulties of that time, either passed the dividend completely or else paid a very much smaller dividend than was paid before the war.

I think, therefore, that from the facts I have brought before the Committee I am entitled to put forward the general proposition that people who own ordinary shares in this limited type of company are very much worse off than the generality of ordinary shareholders; and no case can exist either by the tests applied by the Chancellor or by any other test for penalising them still further by the imposition of an increased tax on distributed profits.

I want most earnestly and most strongly to urge the Government to consider the difficult position of these companies. It is common ground on both sides of the Committee that the Rent Restrictions Acts impose great hardships and difficulties on property owners. That is true in the case of an individual who owns a rent restricted property where he pays no Profits Tax at all; and if it be true in that case, how much more is it true in the case of a limited company which owns rent restricted properties and which, in addition to bearing all the general effects of the Rent Restrictions Acts with their limitations on rents, will be expected to pay a tax on its distributed profits of no less than 50 per cent. unless this Amendment is accepted? I submit that the case for the Amendment and for doing something for the class of company covered by it is quite overwhelming, and I hope it will receive an encouraging and satisfactory reply from the Government.

I listened very carefully to the reasoned and reasonable speech made by the hon. Member for Henley (Mr. Hay), although I did not agree with him in his conclusions. I believe there is a misunderstanding on his part as to the method by which the difficulties which he presented to the Committee can be overcome. Everybody will agree, I think, that a reasonable landlord who has looked after his properties in a proper way—properties covered by the Rent Restrictions Acts—and who did not take advantage of the additional amount
1728
which was allowed by those Acts without performing the obligations additionally entailed, is entitled to some consideration in the question of the cost of repairs.

But I doubt whether this is a method by which that can be given. The cases and the figures which have been quoted have indicated that landlords have not done so badly in view of the capital invested. I asked what were the dividends in the cases quoted by the hon Member. He said in one case the dividend was 7½ per cent. and in another it was something over 5 per cent. Considering the kind of returns which people receive in other directions for the money they invest, those figures are not so bad. I could quote the hon. Gentleman some very much lower dividends.

It follows, therefore, that companies who let their properties, and who have done repairs which cost more now than they cost before the war, have still been able to pay not a bad dividend. If I may say so, that refutes many of the arguments which we have heard when questions of rent restriction have been under consideration, because, according to the story we have been told in the past, the landlord has suffered so badly when he has done repairs, that he has made a loss. It now transpires that he did not make a loss but, on the contrary, while keeping his property in repair and not allowing it to deteriorate, he has been able to receive what I think is a reasonable return for the money he has spent.

One point, I think, cannot easily be overlooked. The hon. Member for Henley said he was not wedded to the figure of 75 per cent. He said it could be altered so long as the principle was conceded. But a very difficult situation arises here, because if we were in any way at all to make an allowance to people outside the Rent Acts the companies concerned would be able to charge whatever they chose for rent. Hon. Members opposite, as well as my hon. Friends, know very well that where the Rent Acts do not apply it is not very easy to get either a house or a flat without paying extremely heavily for it.

I see some hon. Members opposite smiling, but they have only to examine some of the advertisements to realise that people do not only have to pay twice or even three times what was asked before
1729
the war. A very large premium is claimed in addition to a very substantial increase in rent. Perhaps I should go further and say that if we concede the point we should not know exactly where to put the limit as to the percentage of houses which would have to be covered by the Rent Acts in any specific case. We should be giving an advantage to companies trading in this manner by comparison with companies which are trading for other purposes.

I think there has been a serious misunderstanding on the benches opposite about the outlook of my hon. Friends in relation to the small landlord. It is very far from being true to suggest that consideration is not given to the difficulties which confront landlords who are doing their job properly. I would beg hon. Members opposite to understand that millions of pounds have gone into the pockets of bad landlords during the past 35 years since the Rent Acts first came into operation—into the pockets of people who have neglected their duty towards their tenants and who have extracted large sums from them. It may be possible to conceive some method whereby a concession might be made with respect to repairs to a house, but I do not think that we can do it by a method such as outlined in this Amendment.

The hon. Gentleman will appreciate that the question of repairs is only indirectly of importance in connection with this Amendment. What the Amendment seeks to do is not to give the landlord a concession in respect of repairs, but to exempt him and his company from the tax which the Chancellor now seeks to levy.

When the hon. Gentleman puts it that way it sounds very nice. I cannot see why the arguments I have put forward have not convinced him that that would mean the granting of exemption in one set of cases, which would be an invidious distinction between them and other companies who are not granted the exemption.

But the dividends are not limited. I appreciate that the income is limited; I appreciate that they cannot make more profits; but I want the hon. Gentleman to understand that the question
1730
of the dividend payable should be taken into consideration in these matters. Even if the figures were reduced to say, 4 per cent. or 4½ per cent., the landlord would still not be doing so badly. There is no reason why the State should not have some return from that type of investment.

However, that is a very different thing. If hon. Members argue in a general sense, that is a very different matter. If they want to argue that the State should not impose this tax at all, that is a very different matter. What the hon. Gentleman the Member for Henley is attempting to do is to say that there should be a distinction in this matter, and I for my part cannot see, in view of the figures that he has given, and in view of the statements that have been made by the hon. Member for Wimbledon (Mr. Black), why there should be such a distinction in respect of this particular Measure.

There may possibly be a case for a method by which a responsible landlord, who has done his job properly and has continued to carry out the repairs, should be allowed something in respect of this tax. That, however, is a very different case from this.

Does the hon. Gentleman not agree with this in principle? The Chancellor's reason for increasing the tax on profits and dividends was that they were rising, and that they could afford to bear tax. Here is a case where they have not risen and in which, therefore, there is no case for checking an upward rise. The tax will make these dividends lower than before. The hon. Gentleman admits that. This will force dividends down. Does he not agree that this is unfair?

What the hon. Gentleman does not understand is this. I think there is still a margin here whereby the dividend could be reduced. After all, hon. Gentlemen must understand that the holding of property is a secure investment. [HON. MEMBERS: "Not these days."] Oh, yes, it is. I do not see that there is anything to quibble about. The landlord has still got his property and, if the landlord has done what hon. Gentlemen have said he has done, and kept his property in good condition, it is still a good security. The bricks and mortar are considered to be a good security. It is not a speculative venture. It is a venture in which the property owner has his assets
1731
available. Moreover, the rate of dividend should not be any higher in that than in any other section of secure ventures of a similar nature. That is why I am of the opinion that this distinction should not be drawn here irrespective of the amount of the profits.

Before the hon. Gentleman finishes, may I put an example to him and ask him to apply his mind to it? Lennards Real Property Company own shops operated by Lennard Boot and Shoe Company at a fixed rent agreed some years ago. When this new tax was imposed the property company could not pay the dividend it had previously paid—4½ per cent., which was modest enough—because part of the income it had received from the operating company was now taken by the Chancellor. The hon. Member was saying that property companies were a dead safe investment, but the £1 Ordinary shares of that company, which used to stand at round about 20s., are today 7s. 6d.

It is a little difficult to try to examine figures given across the Floor of the Committee without actually knowing the full facts relating to the particular case, and I should not like, as a back bencher, to try to dare to do what is sometimes done even by the Front Bench, but I should like to have a little notice, and time to look at the company's figures and balance sheets and the whole of its machinations. [Laughter.] Perhaps I should use another word, but if any hon. Gentleman can find a better one it is up to him to mention it. All sorts of peculiar things happen with companies. [Laughter.] Yes, indeed, and I should like to know the full facts before giving an answer. But I still say that the argument that I have put forward should convince the hon. Member for Henley, who moved this Amendment, and who is reasonable; and I would suggest that he find a different method of accomplishing what he has in mind.

If I had thought so I should not have spoken. I am not satisfied
1732
that the Chancellor has said everything that there is to say on this matter. I have tried to put forward an argument that he might have used, and which may be even more convincing to hon. Gentlemen opposite than the ones he raised himself.

I do not want to detain the Committee for more than a few minutes, but I do wish to draw the Chancellor's attention to the possible effect this Clause may have on the community at large. A month ago, on 7th May, "The Times" had an article showing the different costs of repairs and maintenance today as compared with earlier days and said that they were turning good landlords into bad landlords. To subject landlords to this increased tax now would, I think, accelerate this very undesirable movement.

In suggesting the tax the Chancellor justified it on the ground that company profits were going up and that they would continue to rise, and that, therefore, the distribution of profits would increase. That is not so in the case of property companies. My hon. Friend the Member for Wimbledon (Mr. Black) has given a sample of 24 companies of which 19 are actually distributing less profits than they were before the war. It is generally agreed on both sides of the Committee that the cost of repairs is about three times what it was before the war. It does seem to me that to impose this extra burden on companies whose income is derived mainly from rent-controlled properties is both grossly unjust to those companies and patently absurd, because by law it prevents any increase in the income or the profits and at the same time increases the Profits Tax.

I believe that the Chancellor is merely trying to have it both ways, and that is grossly unfair. Not that I am arguing that rent control should cease at this moment or that rents should be adjusted, but we should bear in mind the extra cost there is in the repair of this property, and the fact that not to keep it in repair would be against the public interest. Surely companies who derive the bulk of their income from rent controlled properties are in a special category and should be so regarded by the Chancellor. Whether the figure be 75 per cent. or 80 per cent. of their income is immaterial. It is the principle, as my hon. Friend the
1733
Member for Henley (Mr. Hay) said, that is at stake here.

In conclusion, I would ask the Chancellor to consider the analogy of the bus companies and water undertakings. Their fares or charges are also controlled. Hitherto, they have been exempt. Now they are to be subject to 10 per cent. tax on distributions, but not the 50 per cent. tax. Yet those particular companies have the possibility of raising their fares or their charges; and, what is more, they have the possibility of passing on to the consumers their increased burdens. This is denied to property owning companies whose income is derived in the main from rent controlled properties. I urge the Chancellor to give some consideration to this Amendment.

I listened with very great sympathy to what the hon. Gentleman the Member for Henley (Mr. Hay) had to say on this matter. There are echoes in this debate of the debates we used to have on the Expiring Laws Continuance Bills, when we were often reminded of the particular difficulties of those who owned properties and had to keep them in repair. This is not, however, the occasion to go into this problem, although I would not for one minute say that it did not exist.

There was, however, just one point which I did not properly understand. The hon. Member for Henley (Mr. Hay) intervened in the course of my hon. Friend's speech to say that repairs were only indirectly concerned here. If I understood him aright, he argued that there was a connection between his Amendment and the level of repairs. That I found a little difficult to understand, because, as far as I know, if repairs are done the outlay ranks as a deduction in computing the profits, and obviously there is no argument on those grounds for giving relief on the dividends that are paid. If, however, the case is that firms will not do the repairs, again I cannot see where it leads in terms of the Amendment.

May I help the hon. Gentleman? I was merely trying to make the case that, if the man's income is limited, as, in fact, is done by the Rent Restrictions Acts, and if at the same time his expenses—which include, of course, not only repairs but all sorts of other things, such as certain services—go up as well,
1734
his income remains limited, and it is unjust to impose upon him an additional 10 per cent.

I conclude that the hon. Gentleman is saying that these firms might be under some pressure not to do as much repairing as they otherwise would because they would wish either to maintain, or not to lower, their dividend. He asked what I think was the most important question at the beginning of his speech, namely, ought there to be any exemptions? I think he himself appreciated that there were other cases of a kind, which he described that could arise, although he was not concerned with them.

Obviously, this whole matter was one which my hon. Friend had to consider when deciding what should be done, and for reasons which he gave in brief in his Budget Speech he came down against an Excess Profits Tax—and the only way in which the position of undertakings could be safeguarded in this way would be to have some kind of Excess Profits Tax. I think that is the difficult point here, because although the causes of the situation which has been described to us are different in the case under notice, the real position is not peculiar to the companies or other bodies covered by the Amendment.

I think it would be generally agreed that any company, where the profits were either fixed or were falling, would be in exactly the same position as the cases that have been given to us. Nor, I think, would it end there. The hon. Member for Sevenoaks (Mr. John Rodgers) used the phrase "grossly unfair" and talked about "gross injustice." If we are to use that term—although I did not introduce it—we have to consider justice as between people in a like position, and it is clear that any company with a fixed profit or a falling level of profit would be in the same position as companies under notice. But it would not end there, because if that were the argument we should find other people saying, "Our incomes are falling, or fixed, and we therefore ought not to bear the additional taxes which are being imposed because of the needs of re-armament." That would create an anomalous position to everybody.

In drawing the attention of the Committee to those whose profit he alleges may be fixed or falling, is the
1735
hon. Member referring only to those whose profit is so affected by law, as opposed to other economic considerations?

I was not applying it in that way. If we are considering the question of justice, we have to consider the position of the company as well as, if you like, the reasons for that position. After all, we are here concerned with companies who are concerned wholly or mainly with the ownership or provision of dwelling-houses, and, secondly, with those where not less than 75 per cent. by number of the dwelling-houses are owned or controlled. In so far as there is any margin there—and in one of the cases quoted there was very little—there is clearly some room to move, as my hon. Friend pointed out. All I am concerned to argue is that, if what is really behind this Amendment is the idea that we ought not to have a Profits Tax of the kind that we have, then we ought to have an Excess Profits Tax.

While I appreciate what has been said, it would not be possible for my right hon. Friend to accept this Amendment, because to do so would be to admit a principle which we think it would be very difficult to apply, and which would create anomalies in this field of Profits Tax, and also very serious anomalies in every part of the direct taxation field. For those reasons, I am sorry to say that we are not able to accept the Amendment.

The hon. Gentleman has used an entirely different argument from that of the Chancellor in support of this tax. The Chancellor was dealing with rising profits due to no effort on the part of the company, but the Economic Secretary has used an entirely new argument.

There is one point I should like to put to the Economic Secretary which seems to arise from his reply. Surely the principle is already recognised in the special treatment which has been given to industries like bus undertakings and water companies, whose charges have been fixed by law. The fact that their charges have been fixed by law is taken into consideration in computing the Profits Tax they are required to pay.

1736
We are, therefore, not asking for anything in the way of a new principle. All we are asking is that another class of undertaking, which has features common to those of the bus undertakings and water companies, and other undertakings of the same kind, should be brought within that category and treated in the same way. It is not a new principle at all. We are simply asking for the application of a principle which is already recognised and accepted to another class of undertaking, where we say the case for applying it is overwhelming.

As my hon. Friend the Member for Wimbledon (Mr. Black) pointed out, the Economic Secretary rather overlooked the main argument underlying this Amendment. The Chancellor—who I am glad to see here now, and who may perhaps now take over the authority which he delegated to the Economic Secretary—put it perfectly clearly in his Budget speech, both in passages which have already been quoted, and in this one, where he said:
There is no doubt that the level of company profits has recently been increasing rapidly."—[OFFICIAL REPORT, 10th April, 1951; Vol. 486, c. 854.]
He then went on to point out that during 1950 profits rose by about 14 per cent. as compared with other money incomes rising by about 7 per cent. Those were his introductory remarks to the whole question of the increased Profits Tax.

It is against that background that one has got to see the whole question of whether the particular kind of companies to which the Amendment refers are companies proper to be included in this mopping up operation—because that is how the right hon. Gentleman conceived it, as an operation to mop up excess profits which had arisen, and which had arisen, I would point out, as a result of one of the kinds of planning in which the present Minister of Local Government and Planning indulged when he was at the Exchequer. As a result, the value of money has, as we all know, gone down, and there is, therefore, a rise in many profits. But we have not got that in the case of rent controlled houses where the money return was fixed in 1939 or 1914. That is the perfectly clear case which my hon. Friend put forward.

1737
I think that there is a total distinction between the case of a company which may have smaller profits because business is going badly and the case of a company with a satisfactory or lower profit because of the effect of an Act of Parliament. I would suggest to the Economic Secretary and to his colleagues at the Treasury that the argument of anomaly is not a good one in this case, because the Rent Restrictions Acts are an anomaly par excellence and real property is put in an anomalous and disadvantageous position. It is unfair and improper if the Chancellor in introducing this as a special measure aimed against the increasing money value of profits can apply it by a general rough and ready sweep to that particular kind of ownership which has already been singled out by the law for other anomalies and extremely harsh treatment.

The hon. Member for Leicester, North-West (Mr. Janner) picked on one illustration given by my hon. Friend the Member for Henley (Mr. Hay) and said, "Good gracious, these property owners are not doing so badly. Here is one 5¼ per cent. and another 7½ per cent., and probably these two figures relate to the same company—one to A shares and the other to B shares." When my hon. Friend put to him a case of another company doing badly, he said, "You cannot take an individual example; you do not know what it really means."

The hon. Gentleman must realise that these companies can easily sell the properties when they become vacant. Unfortunately, there is no Act which prevents exorbitant profits being made by the sale of a house when it becomes vacant. If the hon. Gentleman had given me notice of the company to which he was referring it is quite within the realms of possibility that I would have been able to answer his point. One cannot answer a point when someone gives a stream of facts without giving the full facts.

The hon. Gentleman is merely underlining what I said—that one cannot base an argument on an individual case. My hon. Friend instanced that company as one which showed a rather dramatic increase in the total amount of taxation on a falling income. The fact that it also paid dividends which were not
1738
entirely negligible does not make this particular case bear out the implications which the hon. Gentleman was trying to apply to it.

I have known from experience individual owners of rent restricted property who have actually been out of pocket. If one looks at one individual case one might look at others. I have known of cases where the property was subject to a landlord's covenant of repair, and when that covenant was discharged—and it could be enforced in the courts—the landlord was actually out of pocket year by year.

We are not dealing with individual cases; we are dealing with the question of companies, and companies do not go so easily into that kind of trap. I agree that certain remedies should be applied in the case to which the hon. Gentleman has referred, but that has nothing to do with this Amendment.

The hon. Gentleman is quite wrong. This Amendment refers to companies which own property just as much as to an individual, and it refers also to unincorporated bodies, such as housing associations. It includes
any body corporate unincorporated society or other body.
I would point out to the hon. Gentleman that it is common knowledge that rent restricted property in this country is an unprofitable investment at the present time, and that the operation of the Rent Restrictions Acts is producing the dilapidation of half the houses in England. He is quite mistaken if he thinks that because one company has been mentioned as having a dividend of 5 per cent. and another of 7 per cent. that there is no real basis or merit behind the Amendment.

I have not yet concluded my remarks. The other point which the Economic Secretary mentioned, and to which the hon. Member for Leicester, North-West, also referred, was the fact that the Amendment refers to the ownership of 75 per cent. by number of rent restricted houses and that that leaves a margin on other ownership which might be unrestricted houses or any other kind of property. Even property which is not subject to the Rent Restrictions Acts—
1739
and there is a good deal of it these days—is very often subject to some other kind of restriction, such as the Furnished Houses (Rent control) Act, and, as my hon. Friend has said, he is not wedded to the particular form of this Amendment—this is a principle which we are putting forward. If there ought to be some apportionment of exemption from Profits Tax, the principle of the Amendment might still be met.

It is no argument against the Amendment to say that it would be difficult to find a way to give effect to it. If one considers the burden imposed upon the landlord by the Rent Restrictions Acts—[Interruption]—I am glad to receive that support by way of acclamation, Mr. Touche.

I want to ask the Economic Secretary and the Financial Secretary to the Treasury to consider whether they cannot meet the point put to them by devising some method which would deal with the slight objections which may be made to this Amendment. It is no answer at all to say that some relief may come later by some other Measure. We all hope that some relief will be given against the Rent Restrictions Acts by some concession in the matter of repairs, but this is the Finance Bill, 1951, and we cannot allow this Clause to pass, with its high rates of Profits Tax on this kind of company, because there is some remote and unspecified prospect that something may be done in the future by way of an allowance for repairs to owners of rent restricted property. I therefore ask the Minister to see if he cannot meet the case put forward by my hon. Friend the Member for Henley.

I must apologise to the hon. Member for Bucks, South (Mr. Bell), for having broken the tape before the gun went. We all of us have a great regard for the Economic Secretary, but he does not seem to be in his most fortunate form this afternoon. I listened to his previous speech. I thought it was the weakest speech I had ever heard, and I did not have to revise my verdict when I listened to his reply to this Amendment. He put his case in opposition to the Amendment on three grounds, all of which have been
1740
quite adequately refuted already by the development of the facts.

In the first place he said that there ought to be no exemptions. As my hon. Friend the Member for Wimbledon (Mr. Black) pointed out, whether there ought to be or whether there ought not to be, there were exemptions already in the case of water and bus undertakings. Therefore, the principle of exemption has already been conceded by His Majesty's Government.

7.0 p.m.

His second argument was that this was not an excess Profits Tax. He said that the Chancellor had considered and had rejected the principle of having an excess Profits Tax. But the argument there was not what tax the Chancellor was proposing, but what argument the Chancellor had used. The Chancellor had justified this Clause on the grounds that dividends were increasing, and, as my hon. Friend pointed out, here was a class of property where dividends were manifestly not increasing. My hon. Friend took 24 companies as an example, and each of them were paying a smaller dividend.

The third argument of the Economic Secretary was to the effect that if once this principle were introduced everyone would demand it, whether it was a case of fixed or falling profits. Again, the question is surely the difference as to whether they are fixed or falling profits owing to the development of circumstances over which nobody has any control, or whether the profits are fixed and falling owing to the deliberate action of the Government. In this case the profits are falling owing to Government action.

From the other side of the Committee we have had the speech of the Economic Secretary, which did not deal with the question at all, and the speech of the hon. Member for Leicester, North-West (Mr. Janner), was the only other contribution. His argument was that he could not support this particular Amendment because it is a discrimination in favour of one special type of company. Then he admitted that some discrimination was necessary in favour of this type of property owner, but he could not support this Amendment, though he would be only too glad on some future occasion, not specified, when some other method of tax relief should be granted. Therefore, he conceded the argument that there was
1741
a case for some special support for people owning this particular type of property.

The hon. Member further argued that the reason why they did not deserve a special discrimination was that the property was a solid asset. He said that if the worst came to the worst they could always sell the property, and they would not do badly out of it. But doubtless hon. Members noticed the phrase in which, in answer to my hon. Friend the Member for Bucks, South, he expressed that principle. He said that they could sell that property because, unfortunately for the moment, there was no Act to prevent them from doing so. I hope hon. Members noticed the adverb "unfortunately," because it showed the position to property owners.

The hon. Member must not misinterpret what I said. What I said—and I said it quite clearly—was that when property becomes vacant there is no Act to prevent the landlord or the owner of that property from charging an exorbitant sum for selling that property, which is a very different thing from what the hon. Member is saying now.

Whether the hon. Member introduces such words as "exorbitant" or not, which arouses certain passions, surely the point is perfectly clear, that the hon. Member, if he had his way, would alter the law about the sale of property. He thinks that the present state of the law is unfortunate. Therefore, it is perfectly clear that he thinks that owners of property are not in the extremely secure position upon which the whole of his argument is based. They are only in a secure position now because the prospects of this Government surviving to pass this legislation are not very bright.

It is clear that the Economic Secretary had no answer whatever with which to resist this Amendment. The hon. Member for Leicester, North-West, has given a reason why this Amendment should be resisted, but only on condition that some other method of tax relief should be given to these people. He has not told us in what form that relief should be.

The whole Committee must feel indebted to my hon. Friend the Member for Henley (Mr. Hay), in initiating so instructive a discussion. What so often happens in the House of Commons is that when the
1742
Committee stage is conducted in a dilatory manner, as it is today, a number of points emerge which might have gone entirely undiscussed. I hope that before the Committee is asked to come to a decision the Economic Secretary will find it possible to say a word or two more to meet what, I think, was an extremely important point raised by my hon. Friend the Member for Wimbledon (Mr. Black), who pointed out that there are now exceptions in these matters, including water undertakings and omnibus companies, which destroyed the case of the Economic Secretary, who said that no breach could be made in this particular part of his front on the Profits Tax.

I was particularly interested in the speech of the hon. Member for Leicester, North-West (Mr. Janner). I hope he will allow me to say across the Floor of the Committee that I always listen with the most earnest attention to him when he deals with rent questions. I recall particularly in the year 1933, when the Government of that time introduced a Rent restrictions Bill, how well informed he was on the subject. He had just come to us after a great public service in defeating the Socialist candidate at Whitechapel, and he took a less collectivist view then than he has expressed this afternoon.

I want to remind the hon. Member that he and I happened to be in agreement in opposing one Clause of that particular Bill. At that time the cost of repairs was not rising but falling and hon. Members took the view that there was a case for a decrease under the Rent Restrictions Act, 1920. If the hon. Member is consistent and has not retrogressed too far since then, he will immediately find himself in alliance with hon. Members behind me in the view that they have expressed this afternoon, because everybody knows that the cost of repairs has moved lamentably in the opposite direction since those days, when he and I took up a perfectly proper and just position, which he has now deserted.

I am anxious to follow up the cost of repairs in whatever direction it may lead, and it has led in the opposite direction to what it was in those days. The hon. Member for Leicester, North-West, will have to explain all these matters to his constituents, probably at a very early date, but that is essentially a matter for him. I merely rise to express the hope
1743
that the Economic Secretary, who made so gracious a speech, will later on, having now found such a yawning gap in his argument, make some endeavour to close it before the Committee comes to a decision.

I rise to protest against the reply given by the Economic Secretary to the Treasury on this Amendment. The reply did not do justice to the Amendment. First, the hon. Gentleman said that he could not accept it because it would make an exception in regard to this tax. Now we have proved to him that that argument is unsound. If the Minister knew his Bill, he would know that there are exceptions in the case of water companies and bus companies, at the lower rate of tax. For the Minister to come forward with that argument is not doing justice in this matter.

Moreover, if the Economic Secretary had read the speech of the Chancellor of the Exchequer, he would have seen exactly what the Chancellor said about the two grounds on which he was imposing this taxation. When the Chancellor's argument was rebutted by my hon. Friends, the Economic Secretary took another line which is not in accordance with the facts. The Economic Secretary has not been fair to the Committee in turning down this Amendment on grounds which he must know are not sound, and he ought to apologise to the Committee. He said definitely that there were no exceptions, but the arguments advanced on this side have shown that there are exceptions. The Economic Secretary ought to be man enough to get up and say: "I am wrong. There are exceptions, and therefore that part of my argument is baseless."

It proves to me that the Economic Secretary has not given sufficient thought to the matter. He should have read the Chancellor's speech and the grounds on which this extra taxation was imposed, grounds which have been rebutted by my hon. Friends. I am sorry that the Economic Secretary should have come forward with such a weak, poor case.

I intervene briefly in support of the very formidable case which has been put from this side of the Committee. The answer which the Economic Secretary to the
1744
Treasury gave was in no way convincing to my hon. Friends. Whether it convinced hon. Gentlemen on the other side of the Committee, I do not know. Before I deal briefly with his speech, I want to reply to the hon. Member for Leicester, North-West (Mr. Janner). He referred to a case quoted by my hon. Friend the Member for Henley (Mr. Hay), who moved the Amendment, relating to a company which is now paying dividends of 7½ per cent and 5 per cent. That is not too bad, but the whole point of the argument is that when the tax is imposed the dividend will be very much reduced or perhaps wiped out altogether.

The main burden of our case on this side of the Committee is that a certain number of companies who are in business owning property which is rent-restricted, and they are prevented by the Rent Restrictions Acts from increasing their profits. It is not only unnecessary but unjust to take the line which appeared in the Chancellor's argument for the tax and that they should be hit by the operation of this tax. The Economic Secretary admitted that there were hardships in these cases. Everybody in this Committee knows that there are hardships. The Economic Secretary feared repercussions. When one is at the Treasury one always fears repercussions.

I beg the Minister to remember that there is no need to be so careful. As has been pointed out, there are already exceptions in this area, like the water companies, who are restrained from making more than a certain amount of profit, but who have separate treatment. I understand also that bus companies are in the same position. These facts dispose altogether of the argument about repercussions. The case put forward from this side of the Committee for the Amendment is very strong. Therefore the Amendment ought to be pressed to a Division, and I hope that my hon. Friend will do so.

Perhaps I might continue my point of order. I asked, during the short time that I spoke, whether the Economic Secretary to the Treasury would not withdraw that portion of his argument which we had proved to be baseless. Is there not an opportunity for the Economic Secretary to withdraw it?

I want to make it quite clear at the outset that we do not object to this Clause because it is a tax upon profits, but because of the effect it will have upon industrial capital. We are against the cupping and bleeding of industry to the present extent. It means that if a company distributes all its profits, the Exchequer takes 66 per cent. If the company distributes none, it takes 52¾ per cent. of those profits This process will destroy industrial capital and the ability of companies to expand.

The Chancellor of the Exchequer the other day tried to waive aside this matter of the depletion of industrial capital. He pointed out the large capital formation which has taken place since the end of the war, in which, of course, he was quite correct. With that I entirely agree, and I would hasten to add that the depletion of industrial capital has not given industry great concern, although it has given them some concern, until the last 18 months when rising prices have had startling effects upon the true profits and fortunes of joint stock companies in industry.

Before I get on to that point, I want to say that we pride ourselves in this period of re-armament on trying to pay our way out of current revenue. I think the Chancellor would claim that is what he is doing; but in that matter, of course, he disagrees very sharply with the hon. Member for Edmonton (Mr. Albu), who treated us to a little speech the day before yesterday, when he produced some rather damp cracker out of his handbag; and he appears, as he is not in his place, to have been trying to get away from the smell the damp cracker ever since.

What the hon. Member for Edmonton says is that in these times companies must raise capital in order to maintain their present assets. There is a grammatical expression called "meiosis", which means saying something very severe in a rather refined way. What the hon. Member for Edmonton, who is a naked
1756
inflationist, says is that companies must raise capital in order to maintain their assets. What he really means is that they must raise capital to pay their taxes, so that that would have very much the same effect, although perhaps not quite the same, if ever the Government floated a defence loan.

I was talking about the depletion of industrial capital. Industrial capital is used for the renewal or modernisation of plant or for the expansion of business, so that I am on exactly the same lines of argument as was the hon. Member for Edmonton. I do not wish to be unfair or to say more than that I am sorry he is not in his place. I am sure he has very good reasons for not being here, one of which probably is that he does not want to hear what I have to say. I do not want to make any point of that, but I think I am not being unfair to the argument which he deployed.

The nature of this tax is unsound, at any rate at this level because what we are doing is raising revenue but at the expense of the lifeblood of industry in the next three or four years. As I said during the earlier debate on the Amendment, much the worst effects, unfortunately, of the Profits Tax are on the developing companies, and on the small and medium-sized companies in particular. Above all, the worst effects are on the developing company, because they have not had time to write down their plant and assets to a figure which will enable them to survive without continual recourse to the capital market in a period of still further rises in price which, I think, we are about to see.

1757
I am extremely sorry, but I feel that I must inflict upon the Committee some discussion on this matter of the depletion of industrial capital, which the Chancellor, I think, is making much too light of. As I have already said, I give the right hon. Gentleman the point that there has been a very large capital formation since the war. I do not know of any board room in which this particular matter of the depletion of industrial capital is not a very burning question. Indeed, it is a little odd that the Tucker Committee appointed by the Government should devote a large part of their Report to discussing a problem which the Chancellor says is really of no account. I beg of him, therefore, to believe that it is of some account.

I turn now to some discussion of the matter, for which I must apologise. I think it is true to say that the Institute of Chartered Accountants could not define precisely what is a profit. The reason they cannot do so is because it is something quite outside figures; something much more incalculable than figures is contained in the matter of profits. A profit cannot really be struck until the company or the man who makes a profit is satisfied that, having distributed it, he could still remain in business and carry on his trade.

7.45 p.m.

I saw a most interesting thing in the 1920's: the effect of inflation in Germany upon the small retailers and small industrial businesses. It may sound paradoxical to say so, but they all went bankrupt from making profits. This is what happened. Take the ordinary sort of confectionery or small sweetmeat shop. They bought some marzipan or other sweetmeat for 10,000 marks, and at the given moment they sold the sweetmeats for 100,000 marks. At that moment the Institute of Chartered Accountants would have said that they would have made a profit of 90,000 marks, but when it came to the matter of continuing to trade they could not replace the sweetmeats or marzipan—

—and so they had to go out of business. Unfortunately, the rent and rates and taxes continued, and they went bankrupt for that reason.

1758
A more industrial example is of the jobbing turner, with a lathe which he bought for £500, who takes in jobbing work and one day is induced by some merchant to sell his lathe for £1,000. Now he cannot get a licence. If he does get a licence, he does not get a lathe; even if he does get a lathe, he probably has to pay £3,000 for it. He is put out of business, just like the confectioner, by taking a profit. That is exactly what will happen if industrial capital is bled to this extent

We heard earlier today something about the retention of profits in industrial companies as being provocative. Quite apart from the fact that the gearing between an increase of distributed profits and an increase in wages is roughly one to ten, a fact on which the Government are generally quite silent, I suggest with all seriousness that the depletion of industrial capital concerns the labour side of industry—that is not a phrase of which I am particularly fond, because I should like to think that we were all on the same side as far as industry was concerned.

It concerns the workman on the bench as much as, if not more than, the shareholder, because one cannot expect to maintain the equipment of industry—and we all know that the horse-power available at the bench is much below what it is in the United States—in a modern condition and keep on renewing it as it should be renewed, unless there is a great inducement to companies to collect undistributed profits.

Our Amendment would have done something to help that particular wish, and I very much hoped that we would get something out of the Chancellor, but he has not given us anything. Over the next three or four years the Government are going to ask a great many workmen to work with tools which are unworthy of their skill. I remember in the war having seen some operations carried on by highly skilled men—the hon. Member for Stoke-on-Trent, South (Mr. Ellis Smith) will remember the incidents of which I am thinking—at an immense waste of their skill, things which could have been done perfectly well with automatics. One saw that happening particularly in small businesses, because they had been through a severe depression, no doubt, and had been obliged to let their industrial capital, their handling facilities and their machine tools get into a state which was far from what
1759
it should have been. We really must not lose sight of the fact that at this rate of Profits Tax industrial capital is going to be bled.

I have said before that in my own company we have had to make reserves of more than the depreciation allowed by the Revenue in order to keep our assets in some sort of line with replacement costs. I am not making any party or political point; this is a matter which, even in long-established companies, is causing the utmost anxiety. It is far worse in those companies from which we must expect a lot of our economic strength to be derived in the near future, who are perhaps exploiting new processes of manufacturing new materials, as in the plastic industry, or are engaged in one of the thousand and one new processes of invention which have been thrown up even since the war. These are the concerns who will feel the thing most.

In our view it is not only to the longest established and matured industrial concerns that we have to look, in the policy of trying to get lively and expanding enterprises in all the new fields which modern science is opening up. I hope that the Chancellor will have second thoughts between now and Report on the possibility of giving a little more impetus to that. Even if we accept, though reluctantly, the proposal for a distributed Profits Tax, I think he ought to be prepared to reduce the undistributed Profits Tax. No doubt it is very tempting in the interests of revenue, and I do not blame him for that, but I think he is getting revenue now in a way which will cause a great deal of dislocation in the future.

The Chancellor and his predecessors have had a very good deal out of the industrial companies over the question of dividends. He asked for something which was not enforceable in law, or which he did not wish to enforce by law, and he got a good response. After three years his reply is a swingeing tax on the distributed profits of the very people on whose good will he has relied during the past three years.

The right hon. Member for Aldershot (Mr. Lyttleton) always puts the case for large-scale industry with considerable ability and in a genial manner, but I do not think we ought to
1760
allow ourselves to be unduly depressed about what he had to say with regard to industrial companies reserves and the effects which will flow from their depletion. A paradox of the moment is that strange contradiction between the pessimism of the proprietors of businesses and the rugged health of their balance sheets.

I do not regard this question of profits with any hostility. Indeed I myself am a business man and, of course, business men are citizens, taxpayers and parents like everyone else. I certainly start out with no hostility to the earning of legitimate profits, but I am bound to say that at the moment profits seem to me to be getting a little out of hand. I would say therefore that this tax is, because of that, an anti-inflationary measure.

With regard to what was said earlier about the observation of the Economic Secretary that it would be provocative to lessen the tax and therefore worsen the position of the wage earners compared with shareholders, I think that was a legitimate observation. After all, we must have some regard to the forces at work in the world. Today we have an educated proletariat, and if we are not prepared to give a fair crack of the whip to the workers, we may have very much more trouble than this tax will bring.

I was looking at that excellent paper the "Daily Herald" which this morning had something to say about current profits. It points out that in the food group Unilever profits are £20 million up on 1949; I.C.I, made £29 million against £15,830,000; Dunlop Rubber Co. £17½ million compared with £9,400,000—

Yes. I am particularly interested in Dunlop Rubber, because I pay about £2,000 a year for Dunlop tyres. I must say I was a bit shocked when I saw their balance-sheet, because over the past 12 months, between 1st January, 1950, and 1st January, 1951, there were four price increases which amounted in all to 75 per cent.; £20 tyres on 1st January, 1950, were £35 by 1st January, 1951—a 75 per cent. increase in prices of tyres; 85 per cent. increase in profit. It seemed to me there must be some connection between these two things. There seems
1761
also to be some irresponsibility, having regard to an inflationary trend, more evident than at any other time in the last six years. This I fear much more than the Russians. I cannot find any excuse at all for the severe increases amounting to 75 per cent. in 12 months when as the result of them profit in the same year goes from £9 million to £17 million, an increase of 85 per cent.

There is a great deal in the argument which the hon. Member is deploying. I think that profits are too buoyant. If there were any sign of the Government resisting or turning down the rise in prices, industrialists would act differently.

We have no assurance of that. I am trying to rebut the right hon. Gentleman's argument that we are skimming off so much fat that companies will not have the money left to effect the necessary replacements and expansions.

Oh, yes. I could give half a dozen illustrations but I take Dunlop's—they were mentioned by the hon. and learned Member for Wirral (Mr. Selwyn Lloyd) in order to save the time of the Committee. Supposing we give 10 per cent. on the new capital or indeed 20 per cent.; that would mean another £2 million accounted for but the profit would still be £6 million up on 1949. The point I am making is that there cannot have been justification for all these 1950 price increases—10 per cent.; 12½ per cent.; 17½ per cent.; 20 per cent.—having regard to the balance sheet which is produced at the end of the year.

I think it is about time we industrialists—and I call myself an industrialist—started to have a higher regard for the needs of the nation than some of us are exhibiting at the moment. Until we do we are presenting ourselves as an everlasting temptation to the Chancellor. The fact of the matter is that, due to a long
1762
period of rationed scarcity, we have acquired a "cost plus" psychology. We have got to the stage where we do not wait until our costs are increased; we anticipate the increase and get in first. This is very dangerous and I think it is about time that the Federation of British Industries and all the trade associations got together to arrive at a new policy in this matter. Until we do, it seems to me to be the duty of the Chancellor to skim off a good deal of this profit, which I am bound to say I regard as almost immoral.

8.0 p.m.

I would say to hon. Members opposite that it is not beyond the bounds of possibility that one day there may be a transference of political power. Then this problem would be theirs. This nonsense cannot go on. We have done very well in the last six years, but our economy could be wrecked by an inflationary spiral. Those in charge of industry and commerce generally are those best fitted to give a lead in the matter of arresting this inflationary trend, which I must say has me terrified.

My final word must be that unless we industrialists are prepared to play the game in this matter and to think in terms of cutting costs and prices instead of continually passing the buck to the consumer, the Chancellor will have to think very deeply about what he should do. I listened to the hon. Member for Mitcham (Mr. Carr) the other day discussing another matter—the increased Petrol Tax. He said that that would mean that the cost of a pound of shoe polish would go up by 1d. Inevitably, he said, this would have to be passed on to the consumer. That is the psychology of industry at the moment. Everything has to be passed on to the consumer. We seem to have lost the habit of thinking in terms of increased turnover and greater efficiency absorbing increased costs.

As these profit figures come out day after day, they frighten me very much. We have an intelligent, educated proletariat today watching these matters. It is no good the Opposition seeking to disguise this. We are going to have a tough time for a good many years. The psychology that prevails throughout the nation will decide whether or not we shall get by. The huge increase in profits which has been revealed as the result of
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1950 trading are a strong deterrent to men pulling their weight in the factories. For all those reasons, I uphold the increase which the Chancellor has introduced, and I hope that my fellow industrialists and commercial men will have serious regard to the inflationary trend which is developing and to which they only can put an end.

The hon. Member for Wednesbury (Mr. S. N. Evans) was, I think, referring to the accounts of the Dunlop Rubber Company. Surely, he should have pointed out that a very large proportion of the increased profit shown in their profit and loss account was what the Americans refer to as "inventory profit," and that the increased profit was counter-balanced to a very large extent by the increased cost of holding and replacing their essential stock in trade. Although the profit was counterbalanced by the increased cost of building and replacing stock, yet that profit itself carried tax at the rate of 50 per cent. or 60 per cent.

I want to refer to two matters which concern this Clause. The first is a rather technical point, and the second is the broader point of the position of business savings. I do not think that so far any reference has been made to the special position of companies which have a high gearing in their capital structure—a high proportion of preference shares. It has been pointed out on more than one occasion that the present system of Profits Tax, where preference dividends are not allowable as a charge, must inevitably bear hardly on companies which have a high gearing and a high amount of preference capital.

That was bad enough when the figure for distributed profits stood at 30 per cent. Now it is being increased to 50 per cent., and the effect on a number of companies, which—for reasons which they are perfectly entitled to have and which have never been challenged—have chosen a capital structure with a high proportion of preference capital, will, in many cases, be to put them in very serious difficulties. The Chancellor ought to bear that in mind. I hope that he will be able to refer to that point if he replies to the debate. I hope that he will go further than the remark made by the present Attorney-General on this point some years ago, when he said that, after all, the companies
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could always change their capital structure, because in practice I do not think it is such a simple matter as that.

I want to come back to the question of company savings. I use the word "savings" rather than the word "reserves," because I think that the word "reserves" has tended to be a little confusing on more than one occasion. Our main objection to the present level of Profits Tax—the two levels combined in this Clause—is that it falls too heavily on company savings.

We argue that company savings at the moment are not adequate. Company savings are not solely the concern of the capitalist. They are just as much the concern of those employed in the businesses. It is only necessary to look at some modern factories, where one may find as much as £5,000 of capital equipment installed for every man employed, to realise how vitally important it is, if employment is to be maintained with a high level of wages, that the companies should be in a position to modernise and maintain their capital equipment.

This is not merely what the Economic Secretary to the Treasury seemed to refer to as a matter affecting a very narrow section of the community. This affects the community as a whole. If the savings of business are not adequate, then the country as a whole will suffer. After all, I think the Committee realises that in present circumstances, apart from the substantial body of saving that flows through the private enterprise insurance companies, the only other main source of individual saving is the saving made by industrial companies.

Earlier today my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) quoted some figures from the Economic Survey which showed, I think, conclusively, that after full provision had been made for stock appreciation, there would not be enough left over to companies to maintain their assets in view of the vastly increased, and increasing, costs of those capital assets. It is the main burden of our argument on the Profits Tax that at the moment companies are not in a position at the present level of taxation to maintain out of their reserves their capital assets.

That argument has been answered on one or two previous occasions by, for
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example, the hon. Member for Edmonton (Mr. Albu) and by the Chancellor, who rather tended to confirm the hon. Member's point of view, and it was referred to in the Millard Tucker Committee Report. The line of reply is, so far as I can see, roughly, first, that that is not true and that companies have got adequate reserves and, secondly, that even if it were true, it is a good thing and should be so.

The hon. Member for Edmonton seemed rather to take the second point of view. He seemed to argue—basing his remarks partly, I think, on the Millard Tucker Committee Report—that if one accepted the principle that a business was entitled to maintain its physical assets in being before it was considered as arriving at a profit for Profits Tax purposes, then one would be allowing the holder of equity shares a privilege in the face of inflation which was not possessed by any other member of the community. That is an argument which I think the Millard Tucker Committee used and which, on the face of it, is attractive. But, surely, it is not an accurate one.

Let us take, for instance, people who, instead of putting their money into ordinary shares, put it into the ownership of a house. The man who bought a house on a mortgage from a building society, which was a very reasonable thing to do many years ago, has seen the money value of his house go up as the real value of his mortgage has gone down. Perhaps the hon. Member for Edmonton has a motor car. Anyone who has been in possession of a motor car has gained by the rise in prices in recent years.

I think it was the hon. Member for Coventry, East (Mr. Crossman), who, in one of those broadcasts in which I am told he is rather adept, was asked what one should do with one's savings in order to deal with this rise in prices. He gave the advice that one should put one's money in wine, clothing and land. I do not know whether that is the right order. That was on the basis that those who might be the holders of ordinary shares would benefit when prices rose.

The second point that underlines the argument is the belief that inflation is with us for ever. If prices always go on rising, there is much to be said for the line of argument taken by the hon. Member for Edmonton, but I doubt if either he or
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the Chancellor would be prepared to state that in their opinion inflation is with us for good and that prices will go on going up for ever. Perhaps, if they do think so, they will be prepared to say so.

Surely it is true that the people who gain when prices go up are those who lose when prices come down? The distinction which should be drawn in industrial concerns is surely the distinction to be drawn between what I might call money stocks and stocks which represent physical assets. For example, let us take debentures, which give the right to the holder to a certain amount of capital, plus a certain payment of income expressed in terms of money. The holder of the equity is really entitled to a share of the productive capacity of the assets of the business, and these two classes of shareholders or loan stock holders are in completely different positions.

The people who hold stock expressed in terms of money gain when prices go down because the value of their stock in terms of money remains, while the value of that stock in real terms increases. The holder of the equity is the person who will gain when prices go up and will have to take the risk of losing when prices come down, and the argument, surely, is that the person who holds the equity, who has really invested his money in a certain productive capacity, is entitled to say, before his income is assessed for Profits Tax purposes, that he is entitled out of the earnings of these productive assets to maintain that amount of productive capacity.

I have listened with great sympathy all the afternoon to this story that is being told, and I should now like the hon. Gentleman to reply to a point I want to bring out. Let us suppose that we allowed the companies to retain more, or that the tax was less. What guarantee have we that the capital assets would be maintained? That is the first point. My second question is this. What guarantee have we got that more would be spent on maintaining the efficiency of the capital equipment, because those publications of the Young Conservatives a few years ago contained the greatest indictment against the hon. Gentleman and his friends, because the concession which they are now advocating has not been used in the past for the purpose of maintaining the efficiency of industry?

I was intending to come to the question of the use that would be made of increased company savings, and, in particular, the question of the increase being used to maintain the existing earning capacity of the company.

Surely, if there were a larger amount of industrial savings, it is obvious that they would be applied to maintaining the earning capacity of the companies, especially if the owners cannot maintain it at the present level. I was arguing that before the Revenue strike a profit on which the holder of the equity should be charged tax he is entitled to maintain out of the profits the physical level of production; otherwise, we get the ridiculous position, which is the final conclusion of the argument of the hon. Member for Edmonton, that a man may go on making profits and yet be completely broke. Although on the Stock Exchange it is said "You cannot go broke making a profit," in modern Socialist economics this seems to be the case. I think the situation would be simplified a little if we permitted the introduction of no-par value shares, because the present system leads to much confusion on this particular subject.

8.15 p.m.

I turn now to the other argument used by the Chancellor in his rather vigorous speech on Clause 13, in which I thought he was trying to follow the motto "Anything Nye can do I can do better." He seemed to say that we could not be right in saying that the working capital of industrial companies is being run down, while, at the present moment, the demand for capital equipment is in excess of capital equipment producing capacity. It is a very powerful argument, although I do not think that it is by any means conclusive.

I think it would have been fairer if the Chancellor had referred to the cash position rather than to the reserves position of companies, the distinction between which has been pointed out by one of my hon. Friends. If he had been a little more forthcoming in the past on the question of bonus shares and the capitalisation of reserves, he perhaps would not have been so misled on this point. A very high proportion of companies' reserves at the moment is held against actual physical assets, either its plant or stock-in-trade, and the only reserve which they have, in a true sense,
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is the money they can use at once to meet any difficulty that arises. The disposable reserves, the reserves that can be thrown into the balance are very much smaller indeed than the total reserves in the conventional use of the word.

I think the Chancellor's next point was that, although the companies had plenty of reserves, if a particular company did not possess adequate cash with which to buy capital equipment they could at any rate get more money by borrowing, and that there would be no difficulty either in raising capital or in obtaining loans at the bank, and that no such difficulties had been experienced.

That, again, appears to be a strong argument, but I think it has many disadvantages. The first is that it is a bad thing to go on heaping additional charges on the same assets in present circumstances, particularly as such charges are of an increasingly rigid kind. The sort of money which can be raised now is loan stock, which reduces flexibility of management. It is not right to say that it is quite simple, that if a company has not got the adequate cash they can soon borrow it, because it is not in that way that the maintenance of industrial assets should be carried out if industrial concerns are to maintain financial health.

One last point about the relation of the yield of tax to the Budgetary problem. I suggested earlier, in interrupting the Economic Secretary, that to tax company savings is merely transferring savings from one pocket to another, or rather from a company holder to the Chancellor of the Exchequer. I referred to the action of the Chancellor on the question of the initial allowances, on which he said that the result of cancelling the initial allowances would be that it would bring in to the Exchequer £170 million, but what he did not explain was that that £170 million was not a contribution to the monetary problem, but was merely a means of discouraging capital investment.

If the Chancellor is right in saying that a transfer of savings in that case has no effect on the main inflationary problem, then, surely, in this case as well, a transfer of savings has no effect on the inflationary problem. The question is whether the savings being made by industry should remain in their hands or be transferred to the State. There are more ways of destroying private industry
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than by nationalisation itself. The destroying or the grabbing by the State of savings is just as effective, and probably more insidious.

The hon. Member for Barnet (Mr. Maudling) always gives us extremely persuasive arguments, and his speech this evening has been no exception. I felt that, so far as his point dealing with preference shares was concerned, there was something in what he said. If, as I hope will be the case—because I think this Protfis Tax is a good tax—we are going to continue it for a long time, I hope my right hon. Friend will consider the position of preference shares under it.

Fairly early in his speech, the hon. Member for Barnet seemed to be afraid that we on this side of the Committee were not paying enough attention to the question of corporate savings. I would not attempt to minimise their importance in our economy at the present time. They have been, and still are, a most essential part of the means of paying for the investment programme.

There are two aspects of these savings, and we must consider this debate against their background. In other words, the savings of companies not only help to pay for the investment programme, but it must also be remembered that they belong to individual shareholders. While, from a national point of view, there may be a short-term advantage in their being as high as possible, there is also an important distributive effect in so far as it encourages the capital wealth of the individual shareholders. One cannot consider the first point without considering the second.

The hon. Member for Barnet put, forward some of the points previously put forward by the right hon. Member for Aldershot (Mr. Lyttelton). I thought he put them forward rather less vehemently and more persuasively. The key note of the right hon. Gentleman's speech was that at the present moment we were bleeding industrial capital. That represents a point of view which we hear very frequently from hon. Members opposite, but which is greatly exaggerated.

Nobody is going to argue that with costs rising, depreciation allowances are in themselves sufficient to meet replacement
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costs as opposed to historical costs. In this connection, my hon. Friend the Member for Edmonton (Mr. Albu), in an extremely interesting speech the other night, went a little further. I think it would be wrong to suggest that in recent years depreciation allowances, plus the taxed profits which companies have been able to put to reserve, have not been more than adequate to maintain the capital of those companies intact.

I think that has certainly been the case, and, indeed, if that is not the case, then it is very strange indeed that companies should at the present time be indulging in this great spate of dividend increases. After all, if company capital is not being maintained intact at the present time, what are we to believe? We are to believe that at the present time many companies are indulging in a great wave of dividend increases, of paying dividends out of capital, not in a legal, but certainly in a real sense.

I cannot reconcile the point of view put forward from the other side that industry is barely able to keep going at the present time with these sweeping increases which have been taking place. After all, the responsibility for maintaining industrial capital intact is not solely that of my right hon. Friend. Surely, in the first place, it is the responsibility of the people who control it. Someone suggested that all these dividend increases were essential if companies were to preserve their credit and to raise new capital.

Is the hon. Gentleman who suggested that seriously contending that many companies who have not raised their dividends in recent months and years have not been able to raise substantial sums of money?

The hon. Gentleman cannot really be following what I am saying. I was not discussing a situation where a company was not paying a dividend or was reducing its dividend, but the situation which has been the typical one in recent months in which a company already paying a substantial dividend has chosen this moment when, according to hon. Members opposite, company resources are being bled and depleted as
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never before, to make substantial additional payments to their shareholders.

I do not want the hon. Gentleman to misunderstand me. He was quoting an hon. Friend of mine and saying what he had said. I heard him say that it was necessary for companies to maintain their dividends, not to increase them.

Has the hon. Gentleman really calculated how many dividends have been reduced? While I agree that a number of companies have increased their dividends, there is a number of companies whose dividends have been reduced, and the balance is not nearly so impressive as the hon. Gentleman is trying to make out.

I should have thought that the general situation was very much more as I have been describing it than as the hon. and gallant Gentleman suggests.

The hon. Member for Barnet tried to join issue with my hon. Friend the Member for Edmonton—who has been much mentioned, and who I see is just joining us in this debate—on the question of whether or not the present system was unfair to the equity shareholder. He quoted a number of examples of individuals who bought personal effects such as houses, cars, or whatever they might be, and said that those people were enjoying the benefits which he is claiming for equity shareholders, and which my hon. Friend denied to them. I do not think that just because there are certain people in this category—and after all the amount of money spent on houses, cars or other things is very small compared with the total amount of money invested—who have had this good fortune, that is an argument for extending it to the equity shareholders.

Again, if it is suggested that this tax at the present time is very unfair to the ordinary shareholder and to risk taking, it is a curious fact that at the very moment when the tax has been put up so sharply one sees one of the biggest switches into equities that there has been for a long time. There is no evidence
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here that equity shareholders are being unfairly treated at the present time.

8.30 p.m.

The hon. Member for Barnet also replied to some points made by my right hon. Friend the Chancellor in his speech a night or two ago about the important thing being the physical limitation on investment. I thought he made a number of interesting points, but I do not think they were really convincing. So many hon. Members on that side of the Committee—though not generally the hon. Member for Barnet—continually talk as though if the Chancellor had been able over the last few years to make concessions of various sorts to industry there was no physical limit to what they could have done in the way of investment.

On the other hand, everybody knows that over the period since this Government has been in office, and certainly at the present time, investment is and has been taking place to the very limit of the physical resources available. That being so, I do not see how one can argue that one can secure any improvement in investment and consequently any increase in productivity as a result of a concession here and in this way.

Hon. Members deploy arguments, some of them moderately convincing, most of them not very convincing, but they never face the fundamental point that on this issue one is not only dealing with the question of how much one might put to investment, but that all these proposals for concessions on the Profits Tax are proposals to carry through a great redistribution of income in favour of the wealthier classes at the present time. That seems to me absolutely intolerable at a moment when, with the cost of rearmament, one is facing a slight overall fall in the standard of living. Until hon. Members face this point, discuss it and they too find an answer to it, they cannot be taken seriously at all on these Profits Tax proposals of theirs.

The hon. Member for Stechford (Mr. Jenkins) has devoted a good deal of his speech to making the point that the rises that have taken place in the values of equity shares on the Stock Exchange are due to increased dividends that have been paid or to increased confidence in the future, which I suppose he
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implies means confidence in the Government. I suggest that these increases in the value of equity shares are due to a very great fear that money will continue to lose its value. In other words, they are a hedge against inflation and no more than that.

As to the point that dividends have been increased and that that in itself is a reason for justifying an increase of Profits Tax, I shall try to deal with that in the general argument to which I want to address myself for a few moments. A profit is not without honour save in Socialist Britain, and this is an extremely dangerous situation. The Clause which we are discussing confirms and increases the Profits Tax, and I want to devote a few moments to examining deleterious effects and to seeking, if I can—with all friendliness since they feel very strongly on this matter—to persuade hon. Members opposite that a profit is really a very good thing not only for those who enjoy it but for the whole community.

One of the very great dangers for our whole economic system and for the living of our people in the future is the idea which hon. and right hon. Members opposite have sedulously and ignorantly cultivated for so long—I say "ignorantly" because if it were not it would be quite inexcusable—that the making of profit is a social crime. Quite the contrary is the case. The test of the efficiency, desirability, public support, and power of survival of any business lies in this question, "Can it make a profit?" In commerce and industry the difference between one side of the account and the other is called a profit. In public affairs it is sometimes called a surplus.

But whether one is the owner of a business of one's own or a director of a public concern, or the National Coal Board or even the Chancellor of the Exchequer, one's most important concern at the end of the financial year is to see that one has more on one side than the other. Even in the case of the trade union secretary or the manager of a slate club it is equally important to have more on the one side than on the other. If not, one either closes down or is fortunate enough to receive a subsidy from the head office, or, if one is a nationalised industry, from the taxpayer. I do not think it can be denied that if there is not more on the one side than on the other,
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the industry cannot continue unless somebody pays for it.

The making of a profit, therefore, is something which we should all approve, applaud and praise, and the national financial policy should be directed towards encouraging those who make a profit and to rewarding them, both personally and corporately. That is my principal objection to the Profits Tax and especially to an increase in it. I agree that this method, together with others, may be used to pay for re-armament, but I do not think we should allow the tax to go by without comment, especially in view of the party political capital which will be made out of it in various parts of the country by Socialists who will claim credit among working men and women because they have increased the profits tax, as if it were a clever thing or a wise thing to do. I suggest that it is a most unfortunate thing to have to do, because the making of a profit is the mainspring of the whole of the wealth of this land.

May I ask hon. Members to consider what is the source of the wealth from which we have paid for the good things we have had in the past six years? A great part of it has come out of the profits of our Victorian and earlier ancestors. Without their thrift, their investment, their incentive to make a fortune for themselves and their families, we should not have had the money to pay for many of the schemes which have been of great value to us in the past five or six years.

By work. All wealth arises out of work. [HON. MEMBERS: "Hear, hear."] There is no other source of wealth, and it is the accumulation of the organised wealth of the Victorian era which has enabled us to survive two wars and to engage in a very large social programme since the second war. I think I have sufficiently made my point and I am only too happy about the approval which it receives from hon. Members opposite.

The second source from which the wealth has come to us is the capitalist country of the United States. Great sums have come from there. The third source is, of course, our own industries—the 80 per cent. of our work and labour and sources of supply and activity in this land which has remained free. These industries have gone on earning money, paying
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dividends, making profits. Without that there would have been no contribution towards the expenditure of the past six years.

Can anyone tell me of one example in which a Socialist industry has made any money? All those industries do is spend it. It is the capitalism of the Victorian era and the present day and the capitalism of the United States which have kept us alive in spite of a Socialist Government, and when we adopt an attitude of mind that all who make a profit and seek to do better for themselves and their families are doing something anti-social, something which is to be penalised by Chancellors of the Exchequer, we are making a great mistake; and if we adopt that attitude long enough we shall rob ouselves of the main source of our wealth.

A wise trade union leader will take his men into battle for higher wages, and, if need be, will use the ultimate sanction of the strike, when the company concerned is full of profits. He would be a fool if he took them out when there were no profits. He knows that perfectly well. Consequently, the making of a profit is not only an advantage to the people who own the equity—providing they can get increased dividends—but it is also of very great advantage to the men employed in the business, because the one time to go to the employer to get more money, or, if need be to strike, is when he is full of money and making good profits, and especially when he is paying a higher dividend.

Let trade union leaders, therefore, remember that to make allies of the Government is to sell the men who put them into power. What they should do instead is to encourage the making of profits by businesses—

Yes, Mr. Diamond. I shall do my best to confine myself to your Ruling, which I greatly appreciate. In so far as this tax will limit profits and dividends, I maintain that it is very bad for the economy of the country, and that to make profits is best not only for the equity holders and the managers but also for the men employed in the businesses.

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That is why I do not want this Clause to stand part. I hold that regard for the law of supply and demand is a wise policy, and that in so far as we depart from it we fly in the face of human nature. If taxation of the kind which we now see exemplified in this Clause had existed in the last 50 years we should never have had the 101 smaller businesses arise out of the enterprise and initiative of the small men and develop until they began to export and make wealth for our land by trading all over the world. This kind of attitude exemplified by this Clause is the kind of attitude that, unless it is stopped, is going to bring our country to ruin. We cannot fly against human nature. We had much better make it work for us.

The hon. Member for Morecambe and Lonsdale (Sir I. Fraser) has introduced a rather controversial party note to our discussion on this Clause which, I think, is rather unfortunate. [HON. MEMBERS: "Why?"] Up to now the discussion has been of a dispassionate and objective nature. I am sorry he introduced that note. However, he did say something which was quite worth listening to. He thought that investment in equities and real estate was a hedge against inflation. There is something in that. I agree that that proves all the more the need to clip that hedge, as the Chancellor is doing in this Clause. To continue the agricultural metaphor, he is not laying that hedge, but clipping it, because it is this rush of money into real estate and equities which follows a rise in prices and profits, which is just the thing it is vital for a Chancellor of the Exchequer to look into, as my right hon. Friend is doing in this Clause.

The right hon. Gentleman the Member for Aldershot (Mr. Lyttelton) said a very interesting thing when he referred to what went on in Germany during the inflation following the First World War. I happened to be in Germany at that time. He said that the inflation that went on then ruined thousands of people in small enterprises. I would add something further. The inflation that went on then gave enormous profits to men like Thyssen—the big industrialists. Although it may have made things difficult for some small people in business because they could not get bank credit, or were not, so to speak, credit-worthy, in the main all that I saw during that period was very large profits
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being made and a very unhealthy state of affairs being created, very largely because there were no taxes levied on profits, or even on incomes, commensurate with the needs of the nation. We are not faced with an inflationary period as serious as that.

I agree, nowhere near it. Still, it is quite right that every Chancellor of the Exchequer should watch in a period like this to see that things do not get out of hand.

The Opposition have, in much of their argument on this Clause, expressed fear of the depletion of industrial capital. If that were true, it would certainly be a matter for very serious concern, but it is difficult to be disturbed about the effects of this if one examines the published balance sheets of companies and the profits made by them, even if they are not distributed. I do not think there is anything wrong in making profits, and I am very glad that in his Budget speech the Chancellor mentioned the fact that in a mixed economy such as we have today, and are likely to have for a long time to come, the profit motive must be taken into consideration. I do not deny that for one moment.

During the war I was a member of the Select Committee on National Expenditure. The hon. Member for Croydon, East (Sir H. Williams) was also a member, as was Sir George Schuster, a distinguished Member of the House at that time. I remember that we went into the question of profits on war contracts, and we found that profits were of a varying nature. Some companies made higher profits because they were the most efficient, and companies making the least profits were often the most inefficient. But there are two aspects to profits. There are profits caused by efficient operations and profits caused by the economic condition of the country over which the entrepreneur has no control; he is merely a beneficiary without any activity on his part.

The first type of profit we want to encourage as much as possible—the profit due to enterprise, to using the latest methods, and to understanding the "know-how." Today I do not say all, but at any rate some of the profit is due to conditions entirely outside the control
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of a company, and due to rising world prices. If things are not to get out of hand, the Chancellor must watch this, and I think he has done the right thing, because he has increased the tax, not on undistributed profits but on distributed profits.

I remember in the autumn of 1949, when the former Chancellor of the Exchequer, Sir Stafford Cripps, raised the Profits Tax from 20 per cent. to 30 per cent., hon. Gentlemen opposite were full of prophecies of woe about what would happen. The figures that appear in the Economic Survey and in the White Paper on National Income and Expenditure do not bear that out. It is true that the hon. and learned Member for Wirral (Mr. Selwyn Lloyd), who opened the debate on the first Amendment today, quoted some figures of personal savings and argued that those figures showed that they had gone down over the last few years. He quoted from Table 26 of the Economic Survey. But that Table also shows that over the last 12 months undistributed profits have gone up £221 million.

The same thing is also shown in the National Income and Expenditure figures (tables 9 and 10). The total income of companies over the last 12 months has gone up £218 million. The dividends and interest on profits distributed have gone up by only £24 million. That is very reasonable. I think that it shows that the incentive of the Chancellor's Profits Tax is against the distribution of profits and for putting profits to reserve. The same statement shows that taxes and tax reserves have gone up by £74 million and undistributed profits have gone up also by £74 million.

All that seems to show that it is a wise thing to encourage putting to reserve for the purpose of improving a business in whatever way it may be necessary. I think that there is no doubt that companies, rather than relying on raising money on the Stock Exchange, are increasingly financing their improvements by methods of this kind. I think that is desirable, and that this Clause gives a further incentive by raising the tax on distributed profits from 30 per cent. to 50 per cent. and keeping the 10 per cent. tax on undistributed profits where it is. I hope, therefore, that the Clause will be approved without any further objections being raised to it.

I am sorry that the hon. Member for Stechford (Mr. Jenkins) has gone, because I think that he performed a very useful function in repeating almost every fallacy that has ever been made on the subject of this tax. Perhaps I might say, even at this late date, as I took no part in any of the Budget discussions and have not spoken on the Finance Bill so far, how much I enjoyed the Chancellor's original Budget speech, which seemed to me to be far the best exposition of a Budget we have heard since the Socialist Government came to power. The weakest point, I thought, in his exposition was when he came to justify the proposals now contained in this Clause. I think that the fallacies of which he was then guilty were repeated subsequently both by him and by the Financial Secretary to the Treasury.

Perhaps the most absurd example was in a speech by the Financial Secretary in the Budget debate, from which I will quote a sentence in a few moments. Of course, the background to our discussion was well expressed by the hon. Member for Wednesbury (Mr. S. N. Evans) in an earlier speech in the discussion in which I am now taking part. He expressed alarm at the background of inflation, and that alarm, I think, is shared by every thoughtful person in the Committee. It has been expressed, to do him justice, by the Chancellor himself, and it has been expressed frequently, of course, from these benches.

What is the proposition underlying this Clause when we remember this background of inflation? It is that there is something improper in the nominal raising of a dividend as measured in a depreciated currency even if the real value of that dividend may be less than before. May I quote a statement which I think is the acme of absurdity? It was uttered by a man of great intellectual attainments, namely, the Financial Secretary to the Treasury and, therefore, is all the more remarkable. This is what he said in the debate on 12th April last:—
In the last few months we have also been urged to consider other ideas such as statutory limitation of dividends, a capital gains tax and so forth.
Now mark the next sentence:
Indeed, in a period of rising prices and profits some case can be made out for all
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these things."—[OFFICIAL REPORT, 12th April, 1951; Vol. 486, c. 1214.]
Of course, if he had said in a period of stationary prices or of falling prices the sentence would have made sense, but to say that there is a great objection to a person receiving more money at a time of rising prices is to say something, which, on the face of it, is ridiculous.

Which hon. Member opposite, who has experience of trade unions—and many hon. Members opposite are honourably connected with trade unions—would say to their trade union members that they must never want more money at a time of rising prices? They would be laughed out of court. What is, therefore, the proposition underlying that quotation from the Financial Secretary? It is that, at a time of inflation, at a time when the value of money is continuously going down, it is improper if the return to the investor does not drop equally rapidly. If it is maintained or slightly increased hon. Members opposite pretend to be very much shocked. That is quite absurd.

The hon. Member for Edmonton (Mr. Albu) the other night made remarks on this subject, to which many of my hon. Friends have alluded. I was surprised that the Chancellor of the Exchequer went out of his way, as I thought, to identify himself with the sentiments contained in that speech. What did the hon. Member for Edmonton say? Let me again use his exact words, and these appeared on 6th June, 1951, when he said this:
If this is not done, the result is that the ordinary shareholders maintain the real value of their investment in money terms, and they are the only section of the investing community, or the saving community, that does so."—[OFFICIAL REPORT, 6th June, 1951; Vol. 488, c. 1143.]
The proposition of the hon. Member for Edmonton is that if a man believes in British industry so much that he places his money in it, he ought to lose his money as rapidly as he would have lost it if he had subscribed to a gilt-edged security when the Minister of Local Government and Planning was at the Exchequer. But is that really so desirable? Is it desirable that a belief in British industry should necessarily be followed by the person who has, that belief losing his money? I say it is quite undesirable.

He was quite wrong in saying that every person at a time of inflation could
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protect his savings or investments in equities unless the Chancellor of the Exchequer insisted on such taxes. As was pointed out by my hon. Friend the Member for Barnet (Mr. Maudling), every person who buys any object of value, no matter what it is, finds that the value of the object goes up as the price of money goes down. The only people to be penalised in this way are the people who do not put their money into buying commodities of various values, but who believe in British industry and put their money into that.

9.0 p.m.

Do we really desire that there should be no kind of hedge against inflation? It was an inadequate hedge though the hon. Member for Stechford seemed to think that people were doing very well indeed who invest in ordinary shares. He left out three-quarters of the picture.

What is the other side of the rise in the nominal value of ordinary shares? It is the fall in the gilt-edged market. People are trying to get rid of any sort of money claim, as the value of money depreciates, and they are putting their money into equities as some sort of hedge, but an inadequate one, against inflation. I wonder whether hon. Gentlemen opposite ever thought of this? Do they imagine there is any investor who puts his money into ordinary shares today who would not much rather that the nominal value of the shares that he bought remained stationary and that the £ maintained its value, rather than that the nominal value of the shares went up and the £ fell even faster?

Some figures were given by my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) in moving the first Amendment. May I give certain other figures, taken from the White Paper on National Income and quoted by the "Economist"? One of them was given by the hon. Member for Gloucester, West (Mr. Philips Price), in the speech that he has just made. Dividends and interest are up by £24 million, from £803 million to £827 million. After the deduction of tax that means roughly an increase of £13 million in the total of dividends and interest, as recorded in the Government White Paper. That figure takes no account of what new capital may have been put into industry.

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What is the comparative figure for wages and salaries, after that deduction? The comparative figure to the £13 million for dividends and interest is £377 million. Those are figures which ought to be borne in mind when hon. Members are considering—considering fairly, if they wish to do so—this increase in dividends of which so much has been said.

Let me give some of the consequences of the doctrine enunciated by the Financial Secretary to the Treasury. I was sorry at the beginning of my speech, when I alluded to the Financial Secretary, that he was not present. I am glad to see that he has now returned. The doctrine to which I referred was that in the passage which I quoted from his speech, about there being much to be said for limitation of dividends at a time of rising prices, a statement which I described as "nonsense." How much nonsense it is will be seen from the considerations which follow.

The doctrine must be that no matter how much the currency depreciates, the ordinary shares should continue to receive no more than the same nominal amount in the depreciated currency. Why should the ordinary shareholder be subjected to that continuous loss? The loss to him as an individual is obvious. It is completely unfair, but what about the penalising of the efficiency of the company? The hon. Member for Gloucester, West, approved, as I should have thought a man of his common sense would approve, such profits as are made as a result of efficiency, but those profits, if they are allowed to benefit the shareholders at all, are subject to the penal tax which the hon. Member is supporting. It is a penalty on efficiency.

What is the influence on saving? Unless the real value of the dividend as contrasted with the nominal value of the dividend can be maintained and occasionally increased, it gives no hedge at all against inflation, and the hon. Member apparently does not wish it to give any hedge against inflation. How is the company to finance itself when it needs more money? It will be entirely unable to do so by a further issue of ordinary shares. If this doctrine is long held, it will be able only to borrow money. If it borrows money on debentures, it means that when there is a slump that company can be brought to an end by
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those who have a claim on the debentures. They may be able to wind up the company. It is surely a much healthier state for British industry that equities should have a good reputation.

I repeat what I said last year, that I detest inflation and that I believe that as a result of inflation a great many profits are too easily made. I would stop inflation and, with it, easily made profits, and the profits that were then made would necessarily be the reward of efficiency. But if there is to be inflation with a continuous fall in the value of the £, then I should prefer British industry to be making good profits in the depreciated currency rather than not to be making such profits, because it would be disastrous if at a time of falling currency the nominal amount of profits earned did not increase.

The Economic Secretary said on an earlier Amendment that any modification of the Clause would be provocative. I believe that hon. Members opposite sometimes think that I am provocative, but I often wish that, if they were provoked, they would be provoked into thought. The provocation which the Economic Secretary deplored was really a provocation to which hon. Members of all parties ought to respond by explaining to any who do not understand them some of the elementary facts about company profits and finances. I have never taken that very low view of the worker in industry which some hon. Members seem to take in thinking that he is incapable of understanding the simple proposition that if everything a company has to buy to keep its plant up-to-date and in condition is more expensive, more money has to be placed to reserve. The worker is quite capable of understanding all those things, and I believe that he understands them much better than many junior Ministers do.

In so far as they are easily made, profits are easily made today as a result of inflation, and the result of this tax is twofold. First, it results in great difficulty in placing a sufficient sum to reserve; and, secondly, it constitutes such a drain on current savings that they have to be employed on keeping capital assets in being. Indeed, if the hon. Member for Edmonton is to be believed, they
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would be insufficient even for that purpose; according to him, further capital has to be raised for that object. These current savings are subject to a drain to keep capital assets in being instead of being available for the financing of new enterprises, and the financing of new enterprises is not unimportant if this country is to maintain its great commercial and industrial position.

I apologise to the Committee if I have detained it too long. Let me say at once that I accept the defence for this tax put up on two or three occasions by the Chancellor of the Exchequer and by the Financial Secretary to the Treasury. They have not, however, produced a direct defence for the tax. Their defence may be paraphrased in these words: "We thought of two or three things that were even sillier and decided not to do them." That is the defence which was produced by the Financial Secretary. I agree that limitation of dividends would have been silly, I agree that a capital levy would have been silly, but that does not mean that this tax is not a bad one.

Sometimes one gets into such a position that one has to tolerate even a bad tax. We have got into that position today, but I hope that hon. Members will not go on thinking it is a good tax, because it is not necessarily even good Socialism to take that view. At the time, long ago, when the Minister of Local Government and Planning had not so far forgotten all the economics he had learned at Cambridge—which enabled him to get a second class—he wrote a book on this subject in which he said what an extraordinarily bad tax it was. So to think the Profits Tax a bad tax does not even make one a bad Socialist, it only means that one is not a completely ignorant Socialist.

Do not let hon. and right hon. Gentlemen opposite be too frightened of recognising the truth about this tax. It is a bad tax. It is absurd that a man of the intellectual prominence of the Financial Secretary should have uttered the sentence I have quoted that
in a period of rising prices and profits some case can be made out for all those things.
In a period of rising prices and profits! If the hon. Gentleman will look at that sentence carefully, he will come to the conclusion that it would have made much more sense if he had said, "In a period
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of stable prices or of falling prices. "The fact that he said it about rising prices made the sentence nonsensical. However I do not blame the hon. Gentleman for that because, as I said, the whole defence of the Government for this tax is, "We thought of three things that were even sillier and have not adopted any of them."

We have now spent over five hours on this Clause and perhaps it would be a good thing if I were to sum up the arguments on both sides. We have had a number of excellent speeches, and points for and against have been thoroughly canvassed. I want particularly to refer to the speeches of my hon. Friends the Members for Wednesbury (Mr. S. N. Evans) and Stechford (Mr. Jenkins), and also the speech of the hon. Member for Barnet (Mr. Maudling). I thought those three were extraordinarily good.

9.15 p.m.

The case for this tax is fairly familiar to the Committee. I explained in my Budget Statement that one of the principles that I thought we ought to follow, in considering where to raise taxation, was to look for those sectors of the economy which were likely to be doing relatively well; in other words, we would see where incomes were rising and we would skim off there rather than go for the incomes which were stationary or falling.

I think it would be generally accepted that during a period of rising prices and during a period of re-armament, one would certainly expect a relative increase in the share of profits, before tax, in the distribution of the national income. As it happens, the facts which I submitted at the time of the Budget equally I think are not in dispute. I said then that the estimated increase in profits for 1950 over 1949 was 14 per cent., which was, of course, substantially greater than the increase in the national income and, therefore, indicated that profits were taking a larger share.

In passing, I might say that the main reason, I think, for that development was obviously the devaluation of the pound and the effect that it had, particularly on the export industries. The actual company figures that have come out recently seem to me to bear out what I have just said. But I do not think there is very
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much doubt that in the period to come, the tendency for profits—profits before tax, that is—to go up in relation to other sources of income is likely to continue.

Indeed, so far as the more recent figures go, they confirm that. For example, for the first four months of 1951 the declared profits are, in fact, just 14 per cent. above the corresponding period of 1950, but in May the increase in profits for those companies whose results were declared in that month was no less than 27 per cent. above the corresponding figure for last year, giving us so far for this year an average of rather over 19 per cent. It will, of course, be within the knowledge of hon. Members that, in a number of well-known cases, large companies have made exceptionally large profits. I agree that in one or two cases that has been associated with an increase in their capital.

I was dealing with the one year against the other. Even including an allowance for the increase in capital, that would certainly not make any material difference to the figures.

The case of Dunlop's was referred to earlier today. If we take, for example, Shell, the increase in profits is 35 per cent.; in the case of Unilever it is 60 per cent., and in the case of Imperial Chemical Industries it is also 60 per cent.; in the case of Courtaulds, it is double. Those are all very striking figures—nobody can question that. Even when we allow for increases of capital, they show a quite remarkable development.

I have already told the Committee what I think the explanation is, but those figures certainly are not just a bagatelle. Indeed, I think that figures of that sort suggest that the argument, to which I will come in a moment, which was the main argument used by the Opposition, that really these increased profits were necessary to finance the higher cost of replacement or the higher value of stocks—in other words, that a lot of them were really no more than the higher cost of the stocks—cannot be sustained. They suggest, to me at any rate, that the profits,
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even if we allow for that—I am not for the moment saying whether or not we should—were quite exceptionally large. Therefore, I maintain that what has happened since the Budget has certainly in no way weakened the case we put forward then for the increase in the Profits Tax.

I argued in favour of it, in particular this year, that it would be for some a restraining influence on the payment of dividends. I should like the Committee to be perfectly clear on this. I did not in fact say I considered it necessary that there should be an absolute reduction in dividends, but I did say that this tendency for dividends to increase, figures rising from 10.7 per cent. over the previous year in January; 9.7 per cent. in February; 14.4 per cent. in March and a much lower figure if we go back to the last part of 1950—

Can the right hon. Gentleman mention at this stage what would be the effect on the Revenue, which I believe takes 70 per cent. of the profits, if there were a substantial measure of reduction of prices leading to a reduction of profits? Surely he ought to touch on that point during his argument.

I was explaining that so far as this year was concerned—I do not think that the right hon. Gentleman heard, perhaps he came in a little after I had explained the point—my main motive was to try to restrain the increase in dividend payments which were being made. I pointed out in my Budget Statement how these have been increasing, and increasing in view of the larger volume of profit which was being earned.

I have already given the figures to the House. In April the increase over the previous year was 8.5 per cent. and therefore, though it is obviously very unwise to take one month alone and say that is conclusive it is perhaps some indication that the rate at which dividend payments had been increasing was being slowed down. I am glad to say that in May, despite these rather striking figures which have appeared in the Press, the rate of increase over last year was 8.8 per cent. In dividend payments at any rate we are just holding the line.

I take it that by giving that last figure the Chancellor has accepted the figure I gave for April of
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8½ per cent. Would he also accept the other figure of capital employed in business, an increase of 12½ per cent.?

I should think it more difficult to measure capital employed in business, and I would prefer not to accept that figure until I had seen the basis of calculation. Hon. Members will probably agree that if we look at this sector of the economy and say that incomes are going up, we should tax on distributed rather than on undistributed profits. We should put an increase on distributed profits. I think that perhaps that has already had some influence. At the same time I would not press the argument there too far.

Hon. Members opposite have argued, both during their discussion on the Motion, "That the Clause stand part of the Bill" and on the discussion on the earlier Amendment, for a reduction on the tax on undistributed profits. They seem to assume, or many of them seem to assume, that that would be bound to increase the corporate savings to exactly the same extent. In other words, the money the company saved by not having to pay such a high rate of tax on undistributed profits would be put to reserve.

That I cannot accept. The hon. Member for Chippenham (Mr. Eccles) did see the point made by my hon. Friend the Economic Secretary that one cannot possibly argue that a change in the rate of tax on undistributed profits would not affect the position of the company as to what dividends it would distribute. In fact, the company would have so much extra money not being paid in tax that it might decide to put it into dividends. It might not. If it did, it would have to pay a certain proportion in tax, but it might nevertheless do so.

I must interrupt again. Does the right hon. Gentleman assign sufficient weight to the fact that he gets between 60 per cent. and 70 per cent.—perhaps he would give the figure—of all these profits? If he does, why does he allow this howl against profit-making to continue without mentioning the fact that he is the profiteer?

I am afraid that the right hon. Gentleman does not seem to be able to follow my speech very well. I apologise if perhaps it has not been altogether as clear as he would have liked. He has not been here during the debate
1789
earlier, and it is much more difficult for him to pick it up. I gave the exact figure, I think, during my speech on the Second Reading of the Finance Bill, but I dare say that the right hon. Gentleman was not here on that occasion either.

Perhaps the right hon. Gentleman would do me the kindness to state now, as we are discussing the Motion "That the Clause stand part of the Bill"—and this is a most important matter—what is the accepted figure for the share which the Revenue takes from the profits of companies?

The right hon. Gentleman the Member for Aldershot (Mr. Lyttelton) gave the figures this afternoon. As far as I know, they were quite correct, and I do not wish to challenge them. Perhaps the right hon. Gentleman will read his right hon. Friend's speech tomorrow.

With great respect to the Chancellor of the Exchequer, my right hon. Friend stated the case for the Opposition. What is important is to have it from the lips of the Chancellor of the Exchequer, representing as he does the administration of the day.

Of course, it all depends on what proportion of profits are distributed. One could take various figures. The right hon. Member for Aldershot took one case where the profits were wholly distributed and another where no profit was distributed. As far as I recollect, the precise figures were, that when all was distributed, it was 66 per cent., and when none of it was distributed it was—

Although the right hon. Gentleman may be concerned to prolong the proceedings, I do not think that this is getting us much further. Perhaps he would allow me to continue now that I have explained the position to him.

The main argument of the Opposition is that, despite these large profits, industry is being bled of her life blood and that there is a shortage, or that there is going to be a serious shortage, of industrial
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capital. All I can say is that, in the first place, I do not think the figures I have given really bear that out. [HON. MEMBERS: "You do not know."] Hon. Members say that we do not know. I concede that no evidence has been produced that that is the case.

Let me say, however, that I realise that hon. and right hon. Members opposite are perfectly sincere when they say that they believe that is happening. But it is a very natural tendency when taxation is involved to say that something is doing national damage when in fact it is damaging one personally. Everybody does that. It is natural enough. I do not think that there is any serious evidence that industry is really being destroyed in this way. When we say, "Look at the demand for equipment at the moment; look at the amount of investment that companies wish to carry out," then the Opposition say, "But you wait and see. It will not always be like that." That is an argument they can put forward but they must not expect it to weigh very heavily with us, because there is no evidence. They are merely saying that they believe that in due course this will come upon us.

May I give an example? The right hon. Gentleman says that we are bringing forward hypothetical cases. I give him the case of everyone engaged in the woollen industry today. Wool which before the war was 3s. a lb. today costs 23s. a lb. If we are to do the same amount of work and employ the same amount of labour, we want £1 extra working capital for every lb. of wool we use. Therefore, if we are to provide the same employment and have the same turnover, a company carrying, say, half a million lbs. weight of yarn wants £500,000 more of working capital. If the Chancellor takes it away in undistributed Profits Tax we are, therefore, that much weaker and not able to do our job.

I could not in any case accept the view that necessarily the financing of the higher priced stocks must be done out of profits. I really think that that is an extraordinary doctrine to put forward, especially at a time of very large increases in wool prices. It really is quite impossible to give, as indeed the Tucker Report shows quite clearly, this privileged
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position to the equity holder and the industrialist. That is their objection to this proposal, as the hon. Member probably knows.

I think I had better say at once, since hon. Members opposite keep on saying that all true profits would take account of the fall in the value of money, that the Tucker Committee completely disagreed with that argument, and said that there was not even a very strong basis for it, and, as far as the accountancy bodies are concerned, they certainly did not share that view. The idea that profits should be so re-defined as to take account of the fall in the value of money was completely turned down by the Tucker Committee.

The next point is this. If, in fact, companies are really so short of capital at the moment, as the hon. Member for Chippenham conceded, it really is indefensible that they should be increasing their dividend payments in this way and on the scale which some of them are doing. The hon. Member for Chippenham admitted that that was so. When it comes to a tax of this kind, nevertheless, that is wrong, although the companies are behaving badly. That is really what the hon. Member is saying, and he completely ignores the whole background of the situation, which my hon. Friend the Member for Wednesbury so clearly sketched in.

The fact is that, in present circumstances—and I have never for a moment disguised it from the House or the Committee—we are faced with a dangerous situation, most dangerous, I think, because of the possibility of a costs inflation; that is to say, an inflation in which we get wages, prices and profits following one another in a spiral which eventually leads the ordinary citizen into a feeling that the value of money will go on falling and lead to greater expenses, a lower rate of saving and so on.

We have discussed this on many occasions, and I have no wish to disguise my own anxieties on the whole situation. If we look at it from that angle, we have to ask ourselves what sort of consequence there is going to be from that situation if we relieve industry and the equity holder
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of this proposed increase in tax, and I have no doubt at all that it would be a most disastrous consequence. It is all very well for hon. Members opposite to say that I should have explained it to the trade unions, pointing out how important it was that we should have higher profits. With some of these profits as they are at the moment, it would take a lot of explaining.

Does the right hon. Gentleman set himself to judge whether the profit has been legitimately, properly or economically acquired in each case or not, before he takes the 66 per cent. which the Exchequer pockets of all these profits?

I have never taken the view that these profits were immoral, but I do think they are fortuitous. They are general, or at least many of them are; that is to say, they are the result of a general world situation, and not particularly the result of the efficient management of individual companies. I am not saying that the companies are not efficient, but the general level of profits is certainly the result of world factors. That is all I am saying.

I should like to bring the Committee back to this very real problem. If we are worried about the dangers of inflation, as I know hon. Members opposite are, then we have to consider the reactions. This is what "The Times," in a leader today which hon. Members may have seen, had to say about this:
The high level of profits, and the weakening of dividend restraint, are a constant source of exasperation to almost the whole trade union movement.
I beg hon. Members opposite not to overlook that. If we are going to ask our friends to exercise restraint in putting forward wage claims, then it is no use at the same time exasperating them first of all by large profits and then by taking off the tax we have just imposed. I think that any serious consideration of this problem must take that very much into account.

I am not quite clear exactly what attitude the Opposition take to this Clause. I understand—of course, we have already voted on it—that they would like to see a reduction in the tax on undistributed profits. We have discussed that already, and I do not propose to say any more about it. But are they or are they not
1793
in favour of the Clause? I gathered from the right hon. Gentleman that they were not proposing to oppose it, but I must tell him that in his absence a number of his hon. Friends expressed considerable hostility towards the Clause. Well, we shall be interested to see which way they vote on it. Are they going to accept the Government's proposal for an increase in the Profits Tax, despite all the anxieties they have put to us today? In that case, I must say that I do not think much of their anxieties.

I am sure the right hon. Gentleman does not wish to be unfair. We have already proposed a reduction in the undistributed Profits Tax. It was our main contribution. He had better wait and see what we do on the other matter.

Of course, I shall wait and see with considerable interest what the right hon. Gentleman does. If hon. Members opposite do not go into the Lobby against it, the right hon. Gentleman will not expect me to take seriously the criticisms made against the Clause by hon. Members opposite.

The right hon. Gentleman really must be fair. We have proposed a reduction in the total tax which would amount to about £33 million. That is a substantial sum, and it is misleading to the Committee to say that we are hostile without wishing to reduce the tax.

If, in fact, the right hon. Gentleman is in favour of the tax, I do not know what the argument is about. Certainly the speeches from the other side have been against it. The issue is really this. In present circumstances we say it is absolutely the right thing to do to increase the tax on distributed profits quite considerably. The Opposition say, in effect, that the Profits

§
Tax is already too high. They claim that there is a shortage of capital for industry. We say there is no sign of that. They say, "never mind, it will appear some time." Well, we are not satisfied with an argument of that kind. We keep our eye far more on the immediate situation which we know is dangerous, and we are not going to be persuaded by the Opposition to drop a tax in favour of equity shareholders in a time of inflation, because we know that were we to do that it would only make the inflationary danger far greater than it is already.

On a point of order. When we first started discussing the Amendments, I understood you to say, Major Milner, that if we held our peace over the narrow points contained in them, there would be ample opportunity for discussion on the Question "That the Clause stand part of the Bill." A certain number of us have been in the House the whole time hoping to exercise that right. Shall we not get the opportunity of doing so?

I really cannot listen to that sort of argument on every occasion. This debate has now continued, on the Clause as well as on the Amendments, since before 4 o'clock. I am sure it is the desire in all parts of the Committee to make progress.

§Mr. R. J. Taylorrose in his place, and claimed to move, "That the Question be now put."

I do not know why there should be this hilarity and air of surprise because I am anxious to ascertain the intentions of the Government, and because on the last Question we abstained from giving direct opposition to the Clause. There were various concessions and considerations which were open, and—

I follow public affairs quite closely, and we always like to vote against the Government, but my hon. Friends and advisers here had the feeling that there was something in the Clause we ought not to oppose, and, therefore, we did not wish to take a direct—[HON. MEMBERS: "Order."] Order about what?—take a direct line on the main question. But what I rose for—[HON. MEMBERS: "For what? "]

I beg to move, "That the Chairman do report Progress and ask leave to sit again."

I apologise to you, Major Milner, and to the Committee for not having mentioned it at the beginning, because I thought prologue might, perhaps, be more agreeable and convenient to the Committee. I move this Motion not in order to attempt to lay down the law on the subject, but to ask the Leader of the House what his intentions are, what his wishes are, about the progress of this Bill, and the methods he intends to employ tonight, and on the subsequent nights and mornings which lie before us.

Of course, Major Milner, if we were to accept this Motion I am afraid that the progress you could report would be very small, and, therefore, I am quite sure that the right hon.
1800
Gentleman will not expect me to accept the Motion at this hour.

Some hours ago through the usual channels we made it known that we were anxious to make substantial progress with the Bill without imposing undue inconvenience on any part of the Committee, and also to enable important matters to come in the early parts of Sittings. I also announced that last week, and did my best to implement it. We have taken almost exactly six hours on the Clause we have just passed. I was hoping that by midnight we could have reached Clause 31. I was hoping some hours ago that that would be possible. We could then tomorrow start, as soon after 3.30 as possible, on Clause 32, which is one that I think ought to be debated, if possible, at a time when the Committee is fresh, and then proceed to the end of the Clauses and start with the new Clauses during tomorrow's Sitting, which I had also hoped we should be able to end about midnight; then we could take the remaining new Clauses and the Schedules on Wednesday; and I would also have been prepared, if we could have reached an arrangement, to give the whole of Thursday to the discussion of the Bill.

Last week the Committee took 34 hours and 39 minutes on the Bill. I think that another 32 hours, which is roughly the period I propose, ought to enable us to get through the Bill, and I very sincerely hope that it may be possible for this to be arranged. The offer was made in perfectly good faith, and as far as I am concerned if there were a genuine desire on the part of the Opposition to achieve this I should do all I could on this side of the Committee to implement it. I am, of course, disappointed that under this
1801
arrangement I should not be able to watch the right hon. Gentleman's gallant efforts through his quadruped at Ascot on Thursday, but business must come before pleasure, as no doubt the right hon. Gentleman will agree. I have, in consultation with my right hon. Friends the Chancellor and the Patronage Secretary, done the very best I can to make an offer to the Committee which should enable us to have adequate discussion on the Bill without undue inconvenience to anybody.

I should like to pay my tribute, not for the first time, to the careful, patient and conciliatory manner in which the right hon. Gentleman the Home Secretary discharges his duties as Leader of the House. We all appreciate his good feeling and his desire to have everything go through as smoothly as possible—to the advantage of the Government. Also, we are always a little bit influenced by the agreeable nature of his personality. I was sorry that he marred the somewhat serious arguments which he laid forward—and which I shall refer to in a minute—by referring to matters which apparently concern not the House but the turf. We all know the right hon. Gentleman's addiction to that pursuit, and this momentary lapse will, I am sure, be pardoned on both sides of the Committee.

The right hon. Gentleman naturally wishes to get his business through as quickly as possible. We wish to make as severe a test as we can of the proposals in the Budget and to bring them to issue in the Committee. When he spoke about discussions which had taken place through the usual channels I was very much obliged to him, because anything that happens through the usual channels is, of course, entirely confidential—until it is made public. That seems to be the rule followed in regard to most of our secrets nowadays.

10.0 p.m.

The right hon. Gentleman has made a series of proposals through the Patronage Secretary, who I see in the corner, which were denounced immediately they had been uttered from below the Gangway as being too generous. [HON. MEMBERS: "Hear, hear."] We have never asked for the generosity of hon. Members opposite. All we ask for is fair play and that they should rule in accordance with the principles of democracy when supported by
1802
the will of the people. [Interruption.] When I began, I was talking to every quarter of the House and not to the hon. Gentleman whose acquaintance I have not the pleasure to enjoy. I do not feel that this is a matter upon which bargains can be made through the usual channels. The discussion of the Budget should proceed, as it does, in accordance with the rights of Members of Parliament and of the Opposition to oppose and so forth, and with the use of the Closure governed, as it is, when demanded, by the long tradition of the House.

I have seen many Budgets carried through the House—I have even carried five myself—and I know well how lengthy the discussions may be. It is all part of the process in which our way of life is sustained that great consideration should be shown, not in the interests of generosity to the Opposition, but as an Act of Parliament—an affirmation which is one of the great foundations on which our ancient civilisation rests. Therefore, we were not able to come to any agreement about details and so forth and say, "It is all wound up and settled." It is not settled. The right hon. Gentleman must decide what hours he chooses to sit. He has a Government majority—What was it last time?—in these matters, and I think that he had much better conduct the Bill—he and the Chancellor of the Exchequer—with the ability, discretion and good feeling which animates on other occasions and let us do our part, as we are called upon to do, as we think fit.

We certainly do not wish to have further discussions on this Bill governed by some detailed good faith arrangement between the Patronage Secretary and my hon. Friends on this side. We think it much better that they should flow out in the normal course and Parliament should take its stake and fortunes as they come, confident that it has a right to do so as one of the great elements and sources of British national life.

I want to point out to the right hon. Gentleman that he did not tell us what he was going to do or what he wished even for tonight on the basis that there is not an agreement or deal between parties. Would he kindly do so now?

The right hon. Gentleman asked me what my intentions were, and my intentions are to work to the hours
1803
that I have mentioned when I was replying to him. I share with him a desire that the conduct of our affairs should be in accordance with the best Parliamentary traditions, and give and take across the Floor of the Committee in exchanges on such a Motion as this is part of the traditional procedure of the House. The right hon. Gentleman does not feel that he can promise we shall have Clause 31 by midnight. Very well, we must sit through the night until such time as public transport is available.

We are now only at Clause 24. The right hon. Gentleman proposes we should deal with Clauses 25, 26, 27, 28, 29, 30 and 31. I must say it seems to me an abuse of the overwhelming majority which he possesses, and I trust will be resisted by every means in our power.

I am speaking with the permission of the Chairman and on a Motion to report Progress. I wish to ask the Leader of the House for an answer to the question which has been repeatedly put to me by my constituents; why should we sit all hours of the night when we took a long Whitsuntide Recess and when, presumably, we are going to rise towards the end of July? Surely there was a long time to discuss the Budget and the vital questions which are at issue on it.

Why should the right hon. Gentleman and the Government continue to adopt the attitude which they do? Why cannot they give us ample time to discuss these matters? Why should they not give us ample time to represent our constituents and to put forward their point of view? Why should they demand that we must get to a definite stage on this Bill? Is that democracy that we are to be told and ordered to get to a certain Clause by a certain time? Is that free debate in a free democracy? I say it is not, and I would
1804
ask the right hon. Gentleman to consider the question which is being asked all over the country by men and women of all parties, why this folly, why this totalitarian system of compelling us to reach a certain stage? The right hon. Gentleman should be more reasonable and give us longer time. Why have such a Whitsuntide Recess and then keep us here to all hours of the night?

To suggest that we can reach Clause 31 by midnight is very unreasonable. Clauses 27 and 28, particularly 28, raise very wide constitutional issues, and Clause 28 alone would take much longer than midnight. To consent to the Government steam-rolling these three or four Clauses in that time is altogether out of the question. Therefore, I wish to impress my point upon the right hon. Gentleman that he is proposing to turn out something, in fact, which we could never carry out.

Before the Committee votes upon this Motion, it should have some idea whether the original proposition made by the Leader of the House was reasonable. I want to follow up what has just been said by my right hon. Friend. If we are to reach Clause 31 by midnight tonight it will involve dealing with something like six pages of the Order Paper and something like 40 Amendments. Is it the right hon. Gentleman's idea of a reasonable attitude to the Business of this Committee that Amendments should go through at the rate of about five to the hour?

These are complicated matters, Clause 28 in particular. There are three pages of Amendments dealing with that Clause alone. I should have thought that clear heads would be needed, and people not excessively tired, to deal with matters affecting the liberty of a great many people. How can the right hon. Gentleman possibly expect to get these Clauses by Twelve o'Clock, with any reasonable discussion? I ask the right hon. Gentleman to reconsider his attitude and to make a more reasonable proposition.

I respond to the request of the hon. and learned Member for Wirral (Mr. Selwyn Lloyd). Of course, if any counter proposal were put forward with regard to the later stages of the Bill that would work within the total time that I have mentioned, I should be perfectly willing to consider it. This offer—and I
1805
do not think there is any very great secret about it—was made many hours ago, when it would have been possible, without any damage to the procedure of the Committee, to have had a decision on Clause 24.

I venture to put one or two observations in the hope of guidance from my right hon. Friend who has recommended a course of conduct which I should have thought would appeal to all the sides of the Committee. I ventured to make an interjection on the subject of this proposal being too generous, and the Leader of the Opposition, quite rightly and fairly, rebuked me by saying that the Opposition had never asked for generosity. That is perfectly true, but in point of fact they have far too often had it, although they never asked for it. This is a classic case in point. What is proposed—if I understand it rightly, and I speak subject to correction—is that an additional day should be given compared with last year or the year before, despite the fact that the Budget was far less controversial—the Budget has been regarded as far less controversial by most newspapers in the country.

The other point, upon which I want to impress my right hon. Friend, and upon which I am speaking with the knowledge that a good many hon. Members on this Committee are behind it, is that we have grown tired on these benches—[HON. MEMBERS: "Hear, hear."]—of a set of circumstances under which, if this Committee extends beyond twelve o'clock, it will be 30 or 40 Labour Members who will sleep about here, without any Conservative Member being present.

10.15 p.m.

That is a circumstance which we are not prepared to tolerate. [HON. MEMBERS: "Oh!"] If the Government have business to do and the reasonable arrangement they have proposed to the Opposition has not been accepted, then deplorable as it is in many ways, so far as many of us on these benches are concerned we expect my right hon. Friend to go ahead and have Government business done in the very fair time schedule he has put to the Opposition. It has been rejected because last Thursday night and tonight, for the first time for many years, the Leader of the Opposition is leading the ballet
1806
chorus for the purpose of Press publicity, and doing what the Chair has been doing consistently since 1945, taking part in all-night sittings.

At last we know who is the power behind the throne, but I must say that I am not very much impressed with the great constitutional authority who guides the Labour benches. I do not propose to give the Committee a lecture on constitutional procedure, but I do propose to ask the Leader of the House and all hon. Members to consider whether we are not making ourselves a little bit ridiculous in the eyes of the country in going away for long holidays and then sitting up all night. Hon. Members go home bleary-eyed, conscious of their innocence, to their wives, posing as heroes after having spent 24 hours in this building.

I believe that the people as a whole are rather impressed once, but after that they think we are a pack of idiots. There is a perfectly good way out of it. We should not just dance to the Government tune and dash through pages and pages of Amendments at breakneck speed, but should allot a proper proportion of days to the discussion of the Finance Bill. The Leader of the House offers himself to the Committee as a great House of Commons man and a keen parliamentarian and upholder of Parliamentary democracy, but I suggest that he is going the best way about it to bring the House of Commons into disrepute.

I support what has been said by my hon. Friend the Member for Farnham (Mr. Nicholson) and my hon. and gallant Friend the Member for Renfrew, East (Major Lloyd). We all realise that the Leader of the House is one of the most reasonable of Ministers, but can he not answer the question put to him as to why the debate should finish on Thursday night? As far as we know, there is no important legislation on the tapis for the rest of this Session. Why should the debate finish on Thursday night? Will he please answer that question?

I had the advantage during the weekend of spending an hour with Sir Bryan Fell, who will be remembered by older hon. Members as one of the wisest of our Clerks. He is now retired. We were talking over the question of all-night sittings and of the
1807Finance Bill and he reminded me that in 1909 the House sat throughout the month of August and had some 900 divisions on the Committee stage of a Finance Bill. Is the Committee less capable—[HON. MEMBERS: "No!"]—of sustaining powerful arguments—[HON. MEMBERS: "No!"]—or of doing its duty—[HON. MEMBERS: "No."]—than our forefathers were? [HON. MEMBERS: "No."] I am told that in those times the Clerks of the House used to have a week off and then a week on so that they might carry out their duties.

The hon. Gentleman the Member for Bilston (Mr. Nally) has indicated his dissent from the all-night Sitting. I affirm that if we were to agree to avoid the all-night sitting, we could only do that by having one Chief Whip, and that means one party, that means destruction of the rights of Parliament, that means destroying the principal function of this House of Commons debating and guarding the taxpayer in all matters of taxation. I think that we ought, as the right hon. Gentleman the Member for Woodford (Mr. Churchill) advised us, to let this debate take its proper course and let every matter have full discussion and a fair hearing.

The control of taxation is the most ancient as it is one of the most vital responsibilities of the House of Commons. I should be wanting in my duty if I did not say that the attitude and approach of the Leader of the House to these matters is a betrayal of that ancient responsibility. The right hon. Gentleman now invites the Committee to join him in that betrayal by shirking its duty to make a full investigation to the financial proposals that have come before us.

It is perfectly true that there is a financial time-table which the constitution

§
of the country requires to be followed, but it is not true that it is necessary, in order to conform to that timetable, to give the very limited amount of hours to the discussion of the Finance Bill that is being done this year. I hold it to be entirely inappropriate and wholly wrong that, for example, the discussion on the Question that Clause 13 stand part of the Bill, which is sanctioning the levying of Income Tax and Surtax for the whole year, was closured after four hours. The discussion on Clause 24, which is making important variations—

With respect, Major Milner, I am doing so purely for purposes of illustration. I am making the point that the right hon. Gentleman starts with this idea: he says, "I will allot so many hours and the discussion must be cribbed, cabined and confined within that short period." I echo what has been said by my hon. Friends, that there is a feeling in the country that the administration of the discussion by Parliament of the Finance Bill has been mishandled by the right hon. Gentleman, who forces discussion in the middle of the night on technical matters which could well be discussed at a proper time if he were content to make the timetable of the House operate as it could and should do. I hope the right hon. Gentleman will realise that the House expects this Committee to do its duty, and that it expects the Leader of the House to make provision to enable the Committee so to do.

§Mr. R. J. Taylorrose in his place and claimed to move, "That the Question be now put."